INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND REPUBLIC OF CONGO Joint World Bank-IMF Debt Sustainability Analysis Update July 2019 Prepared jointly by the staffs of the International Development Association (IDA) and the International Monetary Fund (IMF) Approved by Marcello Estevão (IDA) and Zeine Zeidane and Martin Sommer (IMF) Republic of Congo: Joint Bank-Fund Debt Sustainability Analysis Risk of external debt distress In debt distress Overall risk of debt distress In debt distress Granularity in the risk rating Unsustainable Application of judgment No Based on an assessment of external public debt indicators and given the continued buildup of external arrears, the Republic of Congo is classified as “in debt distress”. Moreover, despite the recent restructuring agreement with China, public debt remains unsustainable with the net present value of external debt in percent of GDP and the external debt service-to-revenue ratios projected to remain above their indicative thresholds in the medium term1. The increase in debt in recent years reflects large fiscal deficits, a large terms-of-trade loss which caused nominal GDP to decline through deflation and a decline in real GDP growth. Domestic debt has also been rising due to the accumulation of domestic arrears and statutory advances from BEAC, deteriorating further overall public debt indicators. Given the accumulation of domestic and external arrears and the fact that the net present value of public debt to GDP remains above its benchmark over the medium term, the overall assessment, after incorporating the Chinese debt restructuring deal, confirms that the Republic of Congo is in debt distress. Going forward, restoring debt sustainability crucially hinges on the pursuit of fiscal consolidation and the restructuring of private commercial claims. 1 Congo’s debt carrying capacity was rated weak according to the composite indicator (CI) based on the April 2019 WEO. As a result, the external debt burden thresholds for The Republic of Congo are (i) 30 percent for the PV of debt-to-GDP ratio; (ii) 140 percent for the PV of debt-to-exports ratio; (iii) 10 percent for the debt service-to-exports ratio, and (v) 14 percent for the debt service-to-revenue ratio. PUBLIC DEBT COVERAGE 1. The coverage of public debt in this DSA is limited to central government, but includes oil- backed debt contracted by SNPC, the largest state-owned enterprise. The stock of debt includes public and publicly guaranteed debt of the central government. Local governments in Congo are not allowed to borrow and depend on local taxes and transfers from the central government. Debt from state owned enterprises (SOEs) not guaranteed by the government is not included in this analysis2 because of limited information on their fiscal performance. This is particularly relevant for the national oil company (SNPC)3, which has suffered from a negative operating balance in recent years due to the slump in oil prices. The company does not meet international benchmarks for sound corporate governance, including an independent board, publication of comprehensive annual reports and annual independent audits. Staff will continue efforts to compile information on SNPC and other SOEs to improve the scope of the DSA in the next report, in line with guidelines under the revised LIC-DSF4. At the same time, the main source of non-central government debt, which was incurred by SNPC with oil traders has been incorporated in the analysis. 2. The contingent liability stress test is customized to account for vulnerabilities associated with rejected domestic arrears, non-guaranteed SOEs debt and litigated debt (Text Table 1). Non- guaranteed SOEs debt is estimated at 10 percent of GDP and we assume half of this amount could end- up on the central government balance sheet. Debt vulnerabilities are also affected by rejected domestic arrears (about 6.4 percent of GDP) and an additional 7.5 percent of GDP claim from a foreign construction company (Commisimpex), which is being litigated (and not included in the debt stock)5. The contingent liability test is also calibrated to account for these potential risks to the public sector balance sheet. At the same time, the experience of previous audits suggests that there is a possibility that the stock of domestic arrears could be revised down substantially after the new independent audit of arrears incurred during 2017–18. This is an upside risk that could mitigate considerably the impact of contingent liability shocks. 2 There are 31 SOEs in Congo, with government ownership ranging from 50 to 100 percent. 3 The cost of activities related to the distribution of refined products is not supported by SNPC, but rather by the government. SNPC simply acts on behalf of the government. 4 See Annex III criteria in the LIC DSF guidance note on when SOEs can be excluded from the DSA. 5 The authorities continue to represent a dispute with respect to this external claim. Disputed claims are not included in the baseline for program purposes, as they are included when calibrating the contingent liability stress test (Text Table 1). 2 Text Table 1. Republic of Congo: Coverage of Public-Sector Debt and Design Stress Tests of Contingent Liability Subsectors of the public sector Sub-sectors covered 1 Central government X 2 State and local government 3 Other elements in the general government 4 o/w: Social security fund X 5 o/w: Extra budgetary funds (EBFs) 6 Guarantees (to other entities in the public and private sector, including to SOEs) X 7 Central bank (borrowed on behalf of the government) X 8 Non-guaranteed SOE debt 1 The country's coverage of public debt The central government plus social security, central bank, government-guaranteed debt Used for the Default analysis Reasons for deviations from the default settings 2 Other elements of the general government not captured in 1. 0 percent of GDP 14.0 Litigated debt (Commisimpex) and rejected domestic arrears 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP 4.9 SOE's debt not guarenteed by the government 4 PPP 35 percent of PPP stock 1.6 5 Financial market (the default value of 5 percent of GDP is the minimum value) 5 percent of GDP 5.0 Total (2+3+4+5) (in percent of GDP) 25.5 1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%. BACKGROUND Evolution and Composition of Public Debt 3. Public debt in the Republic of Congo has increased significantly in recent years, though the trend was reversed in 2018. The increase in debt reflects the rapid accumulation of new domestic and external debt to finance ambitious investment projects and raise public sector wages. The severe terms of trade loss from the decline in international oil prices and the behind-the-curve policy response to the shock, had exacerbated the adverse impact of the fiscal expansion on debt indicators. • Public external debt has increased markedly since Congo reached the HIPC Initiative Completion Point in January 2010. Debt relief resulted in a decline in gross public external debt to just over 20 percent of GDP at end–2010, from about 55 percent of GDP in 2009 (See Press Release No. 10/20, January 28, 2010). Since then, however, public external debt tripled to around US$ 6.9 billion or 61.3 percent of GDP as of end-2018 (Text Table 2). A large share of external debt is owed to China (21.4 percent of GDP) and oil traders (16.4 percent of GDP), with repayment tied to oil shipments. • External payment arrears increased from CFAF 453 billion (US$817 million) at end-2017 to CFAF 520 billion (US$902 million) at end-2018 (Text Table 3) despite a decline in pre- HIPC arrears. The cancellation of some private external debt following court arbitrations and the recent agreement with Saudi Arabia to restructure its pre-HIPC claims according to HIPC terms, have reduced pre-HIPC arrears from 324 billion (US$584 million) as of end-2017 to about CFAF 283 billion (US$497 million) at end-2018. The remaining pre- HIPC arrears are mainly accumulated against the United Arab Emirates (UAE), Angola and some external private suppliers. Arrears to UAE and Angola continue to be deemed away under the policy on arrears to official bilateral creditors, as the underlying Paris Club 3 HIPC agreement is adequately representative. Despite the rescheduling deal reached with China Machinery Engineering Corporation (CMEC) in February 2018, which helped to reduce post-HIPC external arrears by about US$115.8 million, post-HIPC arrears increased from US$234 million at end-2017 to US$411 million at end-2018, though this increase largely reflects new arrears against the oil traders. • Domestic public debt6 rose from 15 percent of GDP at end-2014 to 37.5 percent of GDP at end-2017 as statutory advances and domestic arrears have increased significantly (Text Table 2). Taking into account the results of the first phase of the audit of domestic arrears which covered CFAF 528 billion7, the stock of domestic debt is estimated at 26.5 percent of GDP8 at end-2018. The bulk of domestic debt involves arrears mostly due to contractors in the construction and transportation sectors (8.9 percent of GDP), statutory advances from the regional central bank (8.8 percent of GDP), and pension arrears and unpaid social benefits (3.4 percent of GDP) which started accumulating after the liquidation of public enterprises as severance packages were not paid according to the agreements. Government debt to commercial banks remains relatively small (2.5 percent of GDP) and comes from the issuance of bonds and Treasury bills since 2016. 4. This debt sustainability analysis incorporates the impact of the April 2019 restructuring deal with China. The agreement envisages the repayment of about 1/3 of the stock of debt over 2019– 21, and a 15-year extension of the maturity of the remaining 2/3 of the debt, with an average interest rate of about 1¾ percent. This agreement combined with the February 2018 agreement provides a total debt relief of about $370 million over the program period (2019–22). In addition, it also secures substantial debt relief immediately after the program (2023–28), reducing annual debt service by half, and generating a low and predictable stream of payments over the 2029–45 period (below 0.5 percent of GDP per year). The authorities are pursuing “good faith” negotiations with the oil traders and are committed to completing the restructuring of external commercial debt and domestic debt by time of the first program review. 5. There are weaknesses in public debt management and claims reporting, as recently highlighted by the disclosure in June 2017 of oil-backed loans contracted between 2014 and 2015. According to the January 2018 IMF mission to support the activities of the National Committee for Public Debt (NCPD), weaknesses in the current framework include (i) insufficiently transparent debt 6 External debt is defined on a residency basis with the exception of BEAC advances and CFAF-denominated debt to non-residents in other CEMAC countries, which are considered domestic debt. Classifying this debt as external debt would mechanically worsen the dynamics of external debt indicators, but the risk from this debt is lower than foreign currency denominated debt owing to the lack of currency risk. 7 The authorities initially disclosed in June 2017 a potential stock of CFAF 1573 billion of possible arrears, but they argued that only CFAF 528 billion should be the subject of an audit, given that the balance represented spending that had been committed (“engagé”) but for which no services were received. The audit focused on arrears to government supplier s that had been accumulated over the 2014–16 period. Once the independent audit from Ernst and Young was completed, about 3/4 of this stock was rejected due to irregularities. 8 This stock includes 9.7 percent of arrears not yet audited but recognized by the authorities. However, it excludes other gross claims related to public works (6.4 percent of GDP) rejected by the authorities after internal review. These two stocks will now be subject to a new audit to be funded by the AfDB. 4 management (lack of debt strategy to guide debt mobilization), (ii) lack of a formal Treasury management framework, and; (iii) non-compliance with several CEMAC debt management guidelines (e.g. the debt management strategy is not annexed to the finance law, loan agreements are not ratified by the National Committee for Public Debt, etc.). It also found that the National Committee for Public Debt which was created in 2008 had never been operational. More recently, the committee has been reactivated by the authorities and has adopted a manual of debt procedures (structural benchmark) during its first meeting on May 28, 2019. The implementation of the recommendations of the manual will ensure a better coordination and monitoring of public debt management activities. Text Table 2. Republic of Congo: Gross Public Debt by Creditor, 2015–19 2015 2016 2017 2018 May 2019 CFAF USD percent CFAF USD percent CFAF USD percent CFAF USD percent CFAF USD percent billion million of GDP billion million of GDP billion million of GDP billion million of GDP billion million of GDP Total public debt 5205 8631 102.9 5473 8796 118.6 6096 11000 117.5 5689 9871 87.8 5580 9486 85.5 External debt 4154 6888 82.1 4219 6782 91.4 4152 7492 80.0 3970 6889 61.3 3861 6564 59.1 of which: arrears 378 627 7.5 436 701 9.4 453 817 8.7 520 902 8.0 535 909 8.2 Multilateral and other creditors 115 190 2.3 140 225 3.0 154 278 3.0 207 360 3.2 209 355 3.2 Official bilateral 1768 2932 35.0 1941 3120 42.1 1973 3559 38.0 1816 3152 28.0 1797 3055 27.5 China 1497 2483 29.6 1526 2452 33.1 1434 2588 27.6 1387 2408 21.4 1360 2312 20.8 Private Creditors 2271 3765 44.9 2138 3437 46.3 2026 3655 39.0 1946 3377 30.1 1856 3154 28.4 Oil-prepurchased debt 1484 2461 29.4 1361 2187 29.5 1190 2148 22.9 1061 1841 16.4 965 1641 14.8 Domestic debt 1051 1744 20.8 1253 2015 27.2 1944 3508 37.5 1719 2983 26.5 1719 2922 26.3 BEAC advances 572 949 11.3 572 920 12.4 572 1033 11.0 572 993 8.8 572 973 8.8 Domestic bond 184 295 4.0 198 358 3.8 160 278 2.5 160 272 2.5 BSCA 12 19 0.3 0 0 0.0 0 0 0.0 0 0 0.0 ARC 8 13 0.2 8 15 0.2 0 0 0.0 0 0 0.0 SGEC CONGO 109 176 2.4 109 198 2.1 0 0 0.0 0 0 0.0 ENI 294 487 5.8 183 294 4.0 74 133 1.4 0 0 0.0 0 0 0.0 Audited arrears in CCA 185 307 3.7 185 298 4.0 235 424 4.5 361 626 5.6 361 613 5.5 Commercial 12 20 0.2 12 20 0.3 12 22 0.2 138 239 2.1 138 234 2.1 Social and pensions 170 282 3.4 170 274 3.7 223 402 4.3 223 386 3.4 223 379 3.4 Embassies 3 4 0.1 3 4 0.1 Unaudited arrears 747 1349 14.4 626 1086 9.7 626 1064 9.6 Memorandum items: Additional debt claimed by commisimpex 486 782 10.5 486 878 9.4 486 844 7.5 486 827 7.5 Rejected claims 1/ 1573 2528 34.1 826 1490 15.9 415 720 6.4 415 705 6.4 Sources: Congolese authorities; and IMF staff estimates 1 Claims associated with infrastructure projects rejected by the authorities after an administrative review. 5 Text Table 3. Republic of Congo: External Arrears Situation as of End-May 2019 New New New May 2019 (Excl. End-2015 End-2016 End-2017 End-2018 New arrears arrears arrears in arrears in May 2019 stock unrestructured pre-HIPC stock stock stock stock in 2019 0 in 2016 € 2017- 2018 arrears) milliards de € - milliards de € - € - CFAF CFAF CFAF CFAF CFAF CFAF CFAF CFAF USD percent CFAF USD percent CFAF Billion Billion Billion Billion Billion Billion Billion Billion Billion Million of GDP Billion Million of GDP Total 377.9 58.0 436.0 17.0 453.0 66.9 520 534.6 908.9 8.2 243.8 414.5 3.7 14.7 Multilateral and other creditors 0.0 4.8 4.8 -0.6 4.2 2.6 6.8 7.8 13.3 0.1 7.8 13.3 0.1 1.0 IMF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 World Bank 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IFAD 0.0 0.0 0.0 0.2 0.2 -0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 AfDB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 4.8 4.8 -0.8 4.0 2.8 6.8 7.8 13.3 0.1 7.8 13.3 0.1 1.0 Bilateral 95.5 13.5 109.0 23.2 132.2 -0.3 131.9 153.3 260.7 2.3 94.6 160.8 1.4 21.4 Paris Club 0.0 11.5 11.5 19.1 30.6 29.7 60.3 76.3 129.6 1.2 76.3 129.6 1.2 16.0 Brazil 0.0 8.4 8.4 7.2 15.6 8.4 24.0 28.6 48.7 0.4 28.6 48.7 0.4 4.6 Belgium 0.0 0.0 0.0 1.0 1.0 1.4 2.4 2.8 4.8 0.0 2.8 4.8 0.0 0.4 France 0.0 3.0 3.0 4.0 7.1 20.0 27.1 37.1 63.0 0.6 37.1 63.0 0.6 10.0 Swiss 0.0 0.0 0.0 6.8 6.8 0.0 6.8 6.8 11.6 0.1 6.8 11.6 0.1 0.0 Russia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.9 1.6 0.0 0.9 1.6 0.0 0.9 Non-Paris Club 95.5 2.1 97.5 4.1 101.6 -30.0 71.6 77.1 131.0 1.2 18.3 31.2 0.3 5.5 United Arab Emirates /1 11.6 1.2 12.9 -0.8 12.0 0.6 12.7 13.0 22.1 0.2 0.0 0.0 0.0 0.3 Angola /1 34.5 0.0 34.5 5.7 40.2 1.2 41.5 42.6 72.4 0.7 0.0 0.0 0.0 1.1 China 0.0 0.0 0.0 0.0 0.0 1.0 1.0 1.3 2.1 0.0 1.3 2.1 0.0 0.3 India 0.0 0.8 0.8 1.7 2.4 3.8 6.2 6.8 11.6 0.1 6.8 11.6 0.1 0.6 Kuwait 0.0 0.1 0.1 0.1 0.2 0.2 0.4 0.0 0.0 0.0 0.0 0.0 0.0 -0.4 Saudi Arabia 1/ 46.2 0.0 46.2 -2.6 43.6 -42.9 0.7 1.1 1.8 0.0 1.1 1.8 0.0 0.4 Turkey 0.0 0.0 0.0 0.0 0.0 6.0 6.0 9.2 15.6 0.1 9.2 15.6 0.1 3.2 Postal debt 1/ 3.1 0.0 3.1 0.0 3.1 0.0 3.1 3.1 5.4 0.0 0.0 0.0 0.0 0.0 Private Creditors 282.5 39.7 322.1 -5.6 316.5 64.6 381.2 373.5 634.9 5.7 141.4 240.4 2.2 -7.7 CMEC 2/ 0.0 36.2 36.2 28.0 64.2 -63.8 0.4 0.0 0.0 0.0 0.0 0.0 0.0 -0.4 Eurobond (London Club) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Afreximbank 0.0 0.0 0.0 0.0 0.0 0.2 0.2 10.0 17.1 0.2 10.0 17.1 0.2 9.8 Oil traders 0.0 0.0 0.0 22.4 22.4 126.5 148.9 126.4 215.0 1.9 126.4 215.0 1.9 -22.5 Suppliers 3/ 282.5 3.4 285.9 -56.0 229.9 1.7 231.6 230.6 392.0 3.5 4.9 8.3 0.1 -1.0 Source: Congolese authorities and IMF staff estimates. Sources: Congolese authorities and IMF staff estimates. 1/ End-2015 stocks are unrestructured pre-HIPC arrears. End-2015 1/2/ stocks China Machinery are Engineering unrestructured Corporation, pre-HIPC previously classified arrears. as official bilateral debt (against China). 2/3/ Includes disputed debts (pre-HIPC claims). China Machinery Engineering Corporation, previously classified as official bilateral debt (against China). 3/ Includes disputed debts (pre-HIPC claims). Macroeconomic Outlook 6. Box 1 summarizes the main assumptions for key macroeconomic variables in the scenario underpinning the Fund-supported program as well as the DSA. The baseline scenario assumes that the authorities will continue implementing fiscal adjustment in the medium term to restore long-term fiscal sustainability and support the buildup of regional international reserves. Consistent with the 2019 budget, an adjustment to the non-oil primary fiscal balance of about 10 percent of non-oil GDP is assumed over 2019–23, which would help re-build fiscal and external buffers. Compared to the last published DSA in 2015, the baseline projects higher external disbursements in the medium term, reflecting program financing, but lower disbursements beyond the program period, in line with the authorities’ commitment to pursue prudent external borrowing (Text Table 4). The baseline scenario assumes that Congo continues to obtain external financing on concessional terms, but the degree of 6 concessionality is smaller compared to the 2015 DSA in the first part of the projection period because a portion of program financing is semi-concessional. The grant element then increases progressively and averages at 43 percent over 2024–28 assuming the bulk of new financing is provided on concessional terms9. After 2028, we assume new disbursements become less concessional, bringing back the grant element to about 25 percent over 2028–39. The other financing assumptions are largely unchanged compared to previous DSAs. Text Table 4. Comparison of Assumptions Between the Current and the 2015 DSA (Percent of GDP, unless otherwise indicated) 2019 2020 2021 2027 2035 New Loan Disbursements (billions FCFA) 2019DSA 484 525 360 118 147 2015DSA 182 183 202 201 250 Grant Element of New External Borrowing (in percentage points) 2019DSA 30.3 28.9 33.0 41.4 25.4 2015DSA 48.2 48.2 48.2 48.2 28.1 Primary balance (percent of GDP) 2019DSA 9.3 9.2 9.0 5.6 2.6 2015DSA 1.7 1.0 2.4 1.0 1.9 Real GDP growth (percent) 2019DSA 5.4 1.6 1.9 1.9 3.4 2015DSA -1.6 0.3 2.5 3.1 0.0 Current Account Balance (percent of the GDP) 2019DSA 5.6 5.1 1.6 -5.4 -14.9 2015DSA -2.8 -0.9 -0.4 3.5 7.3 Oil prices (US dollars per barrel) 2019DSA 59.2 59.0 58.1 62.4 73.1 2015DSA 71.0 71.5 72.9 82.1 96.2 Sources: Congolese authorities; IMF and WB staff calculations and projections. 7. Realism tools point out some risks around the forecast. The fiscal adjustment-growth realism tool suggests that the growth path could be optimistic given the projected consolidation. Staff assess the projected growth to be realistic since it is essentially driven by developments in the oil sector. The recovery projected over the coming years under the baseline also factors in the expected increase in confidence if Congo’s program request is approved in 2019, and a stronger policy framework associated 9 China has historically provided the bulk of Congo’s external financing. This financing has also been highly concessional (48 percent grant element). The increase in grant element after the program period reflects our assumption that China would remain the main creditor. 7 with an improved fiscal position (through adjustment and debt restructuring) and the positive impact of the repayment of domestic arrears on the private sector. Box 1. Main Macroeconomic Assumptions • Non-oil sector: Non-oil growth is projected to gradually improve from -5.5 percent in 2018 to 4.1 percent in 2023 as the impact of fiscal adjustment dissipates, investment recovers and the implementation of structural reforms bears fruit. Beyond 2023, non-oil growth is projected to average 4.4 percent, which is similar to the historical average of 4.3 percent over 2008–17, with growth driven by agriculture, forestry, commerce and the transport/communication sectors. • Oil production and prices: Annual oil production is projected to peak at about 140 million barrels in 2019–20 with the ramp-up in production from new offshore fields (Moho Nord and Banga Kayo). Based on official projections, production would steadily decline over 2020– 38, to about 53 million barrels in 2039 in the absence of new oil discoveries. International oil prices remain significantly below their 2013 peak levels but are projected to gradually recover over the medium term from their current levels to about $79 per barrel by 2039. • Inflation: Annual average inflation is expected to increase gradually from 1.2 percent in 2018 to 3 percent in 2024 and to remain close to 3 percent over the long term, consistent with the CEMAC’s convergence criteria of a 3 percent ceiling. • Current account balance: In line with assumed fiscal consolidation and increased oil- production, the current account is projected to remain in surplus over 2019–21, and to gradually turn back to an average deficit of about 1.5 percent over 2022 –24 along with the decreasing oil production and the pick-up in imports associated with the recovery in the non- oil sector. The current account deficit is projected to reach an average deficit of 11 percent over 2025–39, reflecting the projected decline in oil production, which is only partially offset by growth in non-oil exports. • Primary balance: The baseline assumes fiscal adjustment to address the current macroeconomic imbalances. The primary balance is projected to remain in surplus from 2019 onwards thanks to improvements in revenues and containment of spending. 8 Country Classification and Determination of Stress Test Scenarios 8. The newly-introduced composite index (CI) based on the April 2019 World Economic Outlook (WEO) data indicates weak debt carrying capacity for Congo. In the previous DSA framework, which only considered the CPIA rating, also indicated a weak debt carrying capacity for Congo. The new methodology relies instead on a composite indicator (CI) combining the CPIA score, external conditions as captured by world economic growth and country-specific factors. The April 2019 data indicate weak debt carrying capacity, reflecting mainly a low CPIA and a low level of foreign reserves (Text Table 5). 9. Congo should consider commodity price and market financing shocks. Since oil exports represent more than 90 percent of Congo’s exports, the commodity price tailored stress test is triggered. Similarly, as a holder of a Eurobond (issued in the context HIPC debt restructuring), the market financing module is also activated. Text Table 5. Republic of Congo: Composite Indicator Score Components Coefficients (A) 10-year average values CI Score components Contribution of (B) (A*B) = (C) components CPIA 0.385 2.840 1.09 44% Real growth rate (in percent) 2.719 1.439 0.04 2% Import coverage of reserves (in percent) 4.052 32.207 1.31 52% Import coverage of reserves^2 (in percent) -3.990 10.373 -0.41 -17% Remittances (in percent) 2.022 0.000 0.00 0% World economic growth (in percent) 13.520 3.559 0.48 19% CI Score 2.51 100% CI rating Weak Source: IMF staff calculations. The CI cutoff for medium debt carrying capacity is 2.69. DEBT SUSTAINABILITY ANALYSIS External Debt Sustainability Analysis 10. Under the baseline, there are protracted breaches of the PV of debt-to-GDP ratio and the debt service-to-revenue ratio vis-à-vis Congo’s indicative threshold (Figure 1). Reflecting recent increases in public external debt and projected oil production and prices going forward, the present value of debt-to-GDP is projected to remain above the PV of debt-to-GDP threshold of 30 percent. Given lower oil revenues, the gross debt service-to-revenue ratio has also deteriorated markedly since the last assessment, with this indicator now also above the indicative threshold of 14 percent in the medium term. 9 Relative to a DSA not incorporating the April 2019 restructuring deal with China, the deal reduced the debt service-to-revenue ratio to levels below its threshold one year earlier (in 2023 instead of 2024) and maintained it below the threshold with a reasonable margin after 2023. There are marginal breaches of the debt service-to-exports indicator over 2019-20. The evolution of the debt service-to-exports ratio has also improved following the restructuring deal. While these indicators would gradually decline provided fiscal adjustment is undertaken as projected, commercial debt restructuring will still be needed to bring debt to sustainable levels by 2023, in line with the program. The market financing risk module also indicates a moderate risk of heightened liquidity pressures. 11. All indicators of external public debt breach their indicative thresholds by substantial margins in stress test scenarios (Figure 1). Standard bound tests examine the implications of various shocks to the debt and debt-service paths based on the historical volatility of the country’s economic indicators. These result in sharp increases in the debt burden indicators in all cases. The exports shock stress test is the most extreme for all indicators, reflecting the Republic of Congo’s high dependence on oil exports. A decline in exports to a level equivalent to one standard deviation below their historical average in the second and third years of the projection period would cause the present value (PV) of debt- to-exports ratio to rise above 310 percent at its peak. The decline in exports also results in a significant increase in the debt service-to-exports ratio beyond the threshold. Given the small size of the outstanding Eurobond (less than 3 percent of GDP), market-financing risks are low (Figure 5). 12. Reflecting the build-up of considerable new external arrears, together with protracted breaches of thresholds for the PV of the debt-to-GDP and debt service-to-revenue ratios under the baseline, the Republic of Congo is classified “in debt distress”. This result is further supported by the breaches of thresholds of all other debt indicators in the stress scenarios. The re-classification is appropriate, since breaches occur in the very beginning of the projection horizon and remain over the medium term despite assumed strong fiscal adjustment going forward. Table 5 highlights the deterioration in the baseline scenario outcomes for the current DSA compared to the 2015 DSA. Text Table 6. Comparison of PPG Gross External Debt Indicators, Baseline Scenario 2019 2020 2021 2027 2035 PV of Debt-to-GDP Ratio 2019DSA 51.6 48.4 46.2 36.2 22.7 2015DSA 26.2 26.5 25.8 26.2 26.4 PV of Debt-to-Exports Ratio 2019DSA 62.2 59.6 58.7 61.0 60.4 2015DSA 35.2 36.8 37.6 43.9 53.3 Debt Service-to-Exports Ratio 2019DSA 13.9 12.5 9.3 6.6 5.4 2015DSA 4.8 4.4 4.6 3.0 3.8 Debt Service-to-Revenue Ratio 2019DSA 37.4 32.0 22.8 10.7 5.1 2015DSA 9.3 8.5 8.7 5.0 6.3 10 Public Debt Sustainability Analysis 13. An analysis of the Republic of Congo’s overall public debt highlights heightened overall debt vulnerabilities (Figure 2). Under the baseline scenario, the present value of public and publicly guaranteed debt-to-GDP (including domestic arrears and direct financing from the BEAC) is significantly above the 35 percent benchmark level associated with heightened public debt vulnerabilities with a weak debt carrying capacity. The benchmark is breached from 2018 until 2030 under the baseline scenario. This assessment is further supported by stress-tests. The primary balance shock stress test is the most extreme for two indicators based on the present value of public debt, highlighting the need for strong fiscal adjustment over the medium term. Consistent with Congo’s dependence on oil receipts, the most extreme shock for the debt service-to-revenue ratio is the newly introduced commodity price shock. Finally, the accumulation of new domestic arrears also indicates that the risk of debt distress has materialized. CONCLUSION 14. The accumulation of arrears and the breach of the thresholds for external debt and debt service under the baseline and in all the stress tests lead to a classification of Congo’s external debt as “in debt distress”. The accumulation of domestic arrears also confirms the overall rating as being “in debt distress”. This represents a rapid deterioration of debt sustainability, from its low risk classification in the 2014 DSA, and a moderate risk assessment in the 2015 DSA. The protracted breaches of the present value of public debt-to-GDP ratios and the accumulation of domestic arrears also support an overall risk of debt distress rating. The deterioration reflects the continued impact of the oil shock which has been exacerbated by the absence of sufficient fiscal adjustment until 2017, as well as an excessive and non-transparent borrowing policy. It is important for the government to anchor macroeconomic policies by a stability oriented medium-term fiscal framework that targets substantial primary surpluses and a reduction in the non-oil primary fiscal deficit. In addition, a cautious policy for new borrowing to avoid a further deterioration of debt indicators is also needed. Finally, the authorities should not contract new non-concessional loans before the sustainability of public finances has been unequivocally restored, or while Congo’s is still in debt distress or at high risk of debt distress. 15. Over the medium term, improving competitiveness and promoting economic diversification are key to increase resilience to exogenous shocks. Reflecting its high dependence on oil, the Republic of Congo’s debt ratios appear to be most sensitive to swings in oil exports. Given the high concentration and vulnerability of the economy to downward movements in oil prices, broadening the economic base by enhancing the development of the non-oil sector would reduce the volatility of exports and would strengthen the debt service capacity of the Congolese economy. In this regard, efforts to improve the business climate with assistance from the World Bank should help strengthen competitiveness and boost growth. In the same vein, in addressing Congo’s weak physical and human capital, priority should be given to making electricity supply more reliable and competitive, enhancing the quality of transportation, and expanding vocational training to increase labor productivity. 11 16. There is also an urgent need to strengthen public debt and asset management. Capacity development is needed to improve the efficiency of institutions that handle fiscal and debt policies. The recent IMF public debt management technical report highlighted the need to: (i) strengthen the legal and institutional framework to cover the entire process of issuing and managing debt by the re- dynamization of the National Committee for Public Debt (NCPD) and clarification of its attributions; (ii) develop a medium-term debt management strategy and enhance transparency in debt management; (iii) introduce a formal framework for managing the government's cash flows; and (iv) strengthen the staff analytical capabilities with respect to managing the public debt. In addition, there is an urgent need to strengthen debt recording and monitoring capacity, better track all potential liabilities of the government, such as through the collection of data on major SOEs, contingent liabilities and publicly guaranteed debt which are currently not covered in the official debt statistics and the DSA. In line with the recommendations from MCM TA missions, the authorities should move forward with developing a debt management strategy, append it to the budget law, and strengthen the government's cash flow management. 17. The authorities concurred with staff’s assessment that Congo is in debt distress and its debt is unsustainable. They acknowledged the importance of enhanced debt management and the need to monitor debt developments more closely. As a result, in addition to fiscal consolidation efforts, the authorities are pursuing their strategy to restructure Congo’s public debt and implement technical assistance recommendations to improve debt management. 12 Table 1. Republic of Congo: External Debt Sustainability Framework, Baseline Scenario, 2016–39 (Percent of GDP, unless otherwise indicated) Actual Projections Average 8/ Historical Projections 2016 2017 2018 2019 2020 2021 2022 2023 2024 2029 2039 External debt (nominal) 1/ 91.4 80.0 61.3 58.1 56.6 55.5 54.2 51.5 49.7 38.6 20.2 50.8 49.3 Definition of external/domestic debt Currency-based of which: public and publicly guaranteed (PPG) 91.4 80.0 61.3 58.1 56.6 55.5 54.2 51.5 49.7 38.6 20.2 50.8 49.3 Is there a material difference between the two Yes criteria? Change in external debt 9.3 -11.4 -18.7 -3.2 -1.4 -1.2 -1.3 -2.6 -1.9 -2.3 -1.4 Identified net debt-creating flows 34.0 -9.5 -28.4 -13.0 -10.2 -6.8 -3.3 -3.7 -3.9 5.0 10.0 -5.4 -3.5 Non-interest current account deficit 61.1 4.3 -8.6 -7.0 -6.4 -2.8 0.3 1.0 0.7 9.3 16.0 6.9 0.8 Deficit in balance of goods and services 51.9 -6.9 -22.2 -20.4 -18.8 -15.6 -11.5 -10.4 -10.6 0.2 9.4 0.0 -10.3 Exports 59.1 73.3 83.3 83.0 81.2 78.8 75.3 73.2 70.7 51.9 30.9 Imports 110.9 66.4 61.1 62.7 62.4 63.2 63.8 62.8 60.1 52.1 40.3 Debt Accumulation Net current transfers (negative = inflow) 6.6 5.0 4.0 3.8 3.8 3.9 4.1 4.2 4.3 4.7 4.0 4.0 60 1.4 4.2 of which: official -0.2 -0.5 -0.1 -0.4 -0.4 -0.4 -0.5 -0.5 -0.5 -0.7 -0.8 3.0 Other current account flows (negative = net inflow) 2.6 6.2 9.7 9.6 8.7 8.9 7.8 7.2 7.1 4.5 2.6 5.5 6.9 50 Net FDI (negative = inflow) -37.6 -3.7 -2.9 -4.1 -4.2 -4.1 -4.7 -4.9 -4.3 -3.8 -5.6 -12.5 -4.1 2.0 Endogenous debt dynamics 2/ 10.5 -10.1 -16.8 -1.9 0.4 0.1 1.0 0.1 -0.4 -0.5 -0.4 1.0 40 Contribution from nominal interest rate 2.4 1.6 1.9 1.4 1.2 1.1 1.0 0.8 0.7 0.5 0.3 Contribution from real GDP growth 2.6 1.4 -1.0 -3.4 -0.9 -1.1 0.0 -0.7 -1.1 -0.9 -0.7 0.0 30 Contribution from price and exchange rate changes 5.5 -13.1 -17.8 … … … … … … … … -1.0 Residual 3/ -24.7 -1.8 9.6 9.7 8.8 5.7 2.0 1.1 2.1 -7.4 -11.4 4.6 1.4 of which: exceptional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -2.0 20 -3.0 Sustainability indicators 10 PV of PPG external debt-to-GDP ratio ... ... 54.2 51.6 48.4 46.2 44.5 42.3 41.0 32.1 17.9 -4.0 PV of PPG external debt-to-exports ratio ... ... 65.0 62.2 59.6 58.7 59.1 57.8 58.0 61.9 57.9 -5.0 0 PPG debt service-to-exports ratio 13.1 8.9 8.6 13.9 12.5 9.3 8.4 5.8 3.7 6.5 5.9 2019 2021 2023 2025 2027 2029 PPG debt service-to-revenue ratio 23.4 24.0 24.6 37.4 32.0 22.8 18.9 12.5 7.6 8.9 4.4 Gross external financing need (Million of U.S. dollars) 2433.1 637.2 -508.3 57.3 -46.1 52.0 234.0 47.5 -105.8 1182.0 2728.5 Rate of Debt Accumulation Grant-equivalent financing (% of GDP) Key macroeconomic assumptions Grant element of new borrowing (% right scale) Real GDP growth (in percent) -2.8 -1.8 1.6 5.4 1.6 1.9 0.1 1.3 2.3 2.4 3.3 3.4 2.0 GDP deflator in US dollar terms (change in percent) -6.3 16.8 28.5 -7.4 0.3 -0.8 -2.1 -0.7 0.9 0.4 2.4 0.3 -0.8 Effective interest rate (percent) 4/ 2.6 2.0 3.1 2.3 2.2 2.0 1.8 1.5 1.4 1.2 1.2 1.4 1.6 External debt (nominal) 1/ Growth of exports of G&S (US dollar terms, in percent) -9.5 42.3 48.5 -2.7 -0.4 -2.0 -6.5 -2.3 -0.3 -4.3 0.7 6.4 -3.1 of which: Private Growth of imports of G&S (US dollar terms, in percent) -9.1 -31.4 20.2 0.1 1.4 2.3 -1.1 -1.1 -1.3 1.4 2.5 3.1 -0.3 70 Grant element of new public sector borrowing (in percent) ... ... ... 30.3 28.9 33.0 36.6 53.2 41.4 25.3 25.6 ... 37.7 Government revenues (excluding grants, in percent of GDP) 33.2 27.3 29.1 30.9 31.7 32.3 33.7 34.1 34.5 38.0 41.4 38.5 34.6 60 Aid flows (in Million of US dollars) 5/ 247.6 205.1 312.9 318.3 321.5 306.8 201.5 209.0 216.5 92.9 178.6 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 2.7 2.7 2.2 1.5 1.1 1.2 1.1 1.1 ... 1.6 50 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 34.1 32.5 37.8 47.4 69.6 55.9 47.1 54.0 ... 50.3 Nominal GDP (Million of US dollars) 7,787 8,932 11,664 11,382 11,592 11,715 11,472 11,532 11,902 13,269 22,292 40 Nominal dollar GDP growth -9.0 14.7 30.6 -2.4 1.8 1.1 -2.1 0.5 3.2 2.8 5.7 3.6 1.2 30 Memorandum items: 20 PV of external debt 7/ ... ... 54.2 51.6 48.4 46.2 44.5 42.3 41.0 32.1 17.9 In percent of exports ... ... 65.0 62.2 59.6 58.7 59.1 57.8 58.0 61.9 57.9 10 Total external debt service-to-exports ratio 13.1 8.9 8.6 13.9 12.5 9.3 8.4 5.8 3.7 6.5 5.9 PV of PPG external debt (in Million of US dollars) 6321.1 5873.6 5612.8 5417.9 5105.1 4881.9 4882.4 4259.7 3984.9 0 (PVt-PVt-1)/GDPt-1 (in percent) -3.8 -2.3 -1.7 -2.7 -1.9 0.0 -0.9 -0.2 2019 2021 2023 2025 2027 2029 Non-interest current account deficit that stabilizes debt ratio 51.9 15.7 10.1 -3.7 -5.0 -1.6 1.7 3.7 2.6 11.6 17.4 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 13 Table 2. Republic of Congo: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39 Actual Projections Average 6/ 2016 2017 2018 2019 2020 2021 2022 2023 2024 2029 2039 Historical Projections Public sector debt 1/ 118.6 117.5 87.8 81.7 76.6 71.6 66.8 60.7 57.3 41.4 20.6 73.2 59.6 of which: external debt 91.4 80.0 61.3 58.1 56.6 55.5 54.2 51.5 49.7 38.6 20.2 50.8 49.3 Definition of external/domestic debt Currency-based of which: local-currency denominated Change in public sector debt 15.6 -1.1 -29.7 -6.2 -5.1 -5.0 -4.8 -6.1 -3.4 -3.3 -1.5 Is there a material difference Identified debt-creating flows 34.3 -13.9 -27.3 -9.1 -8.8 -8.6 -6.1 -7.6 -8.9 -5.0 -2.7 -0.5 -7.2 Yes between the two criteria? Primary deficit 17.8 5.2 -8.9 -9.3 -9.2 -9.0 -9.1 -8.3 -8.0 -4.5 -2.1 0.4 -7.5 Revenue and grants 34.1 27.9 29.2 31.4 32.1 32.7 34.2 34.7 35.1 38.7 42.2 38.9 35.1 of which: grants 0.9 0.6 0.1 0.4 0.4 0.4 0.5 0.6 0.5 0.7 0.8 Public sector debt 1/ Primary (noninterest) expenditure 51.8 33.1 20.3 22.0 22.9 23.7 25.1 26.4 27.1 34.2 40.1 39.3 27.7 Automatic debt dynamics 15.5 -19.9 -18.5 0.4 0.5 0.7 3.0 0.7 -0.9 -0.5 -0.6 of which: local-currency denominated Contribution from interest rate/growth differential 6.0 -0.6 -7.8 -2.7 -0.7 -1.1 0.4 -0.9 -1.5 -1.1 -0.5 of which: contribution from average real interest rate 3.0 -2.8 -5.9 1.8 0.6 0.4 0.4 0.0 -0.1 -0.1 0.2 of which: foreign-currency denominated of which: contribution from real GDP growth 3.0 2.1 -1.8 -4.5 -1.3 -1.4 0.0 -0.8 -1.3 -1.0 -0.7 90 Contribution from real exchange rate depreciation 9.5 -19.3 -10.7 ... ... ... ... ... ... ... ... 80 Other identified debt-creating flows 1.1 0.8 0.0 -0.1 -0.2 -0.3 0.0 0.0 0.0 0.0 0.0 0.9 -0.1 70 Privatization receipts (negative) 1.1 0.8 0.0 -0.1 -0.2 -0.3 0.0 0.0 0.0 0.0 0.0 60 Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 50 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40 Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 30 Residual -18.6 12.8 -2.3 6.0 5.0 5.4 4.0 3.0 6.1 2.3 1.1 1.4 4.4 20 10 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 82.8 74.9 68.2 62.2 57.1 51.4 48.6 34.8 18.2 2019 2021 2023 2025 2027 2029 PV of public debt-to-revenue and grants ratio … … 284.0 238.9 212.7 190.4 167.0 148.2 138.4 90.0 43.1 Debt service-to-revenue and grants ratio 3/ 28.6 26.4 30.5 48.6 46.4 38.8 35.5 27.7 16.4 16.6 8.7 Gross financing need 4/ 28.5 13.4 0.0 5.8 5.5 3.4 3.0 1.3 -2.2 1.9 1.6 of which: held by residents Key macroeconomic and fiscal assumptions of which: held by non-residents 1 Real GDP growth (in percent) -2.8 -1.8 1.6 5.4 1.6 1.9 0.1 1.3 2.3 2.4 3.3 3.4 2.0 Average nominal interest rate on external debt (in percent) 2.7 2.1 3.0 2.4 2.2 2.0 1.8 1.5 1.4 1.2 1.2 1.4 1.6 1 Average real interest rate on domestic debt (in percent) 7.7 -10.6 -17.6 5.8 2.1 2.8 4.4 3.0 1.7 6.7 81.9 2.0 3.9 Real exchange rate depreciation (in percent, + indicates depreciation) 11.0 -20.7 -13.5 … ... ... ... ... ... ... ... 5.2 ... 1 n.a. Inflation rate (GDP deflator, in percent) -6.1 14.4 22.9 -4.3 -0.8 -1.4 -2.8 -1.0 0.8 0.4 2.4 1.6 -0.8 0 Growth of real primary spending (deflated by GDP deflator, in percent) -10.9 -37.3 -37.7 14.3 5.7 5.3 6.0 6.6 5.0 6.3 4.2 5.4 7.0 Primary deficit that stabilizes the debt-to-GDP ratio 5/ 2.1 6.3 20.8 -3.2 -4.1 -4.0 -4.3 -2.2 -4.6 -1.2 -0.6 9.7 -3.2 0 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 2019 2021 2023 2025 2027 2029 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government plus social security, central bank, government-guaranteed debt. Definition of external debt is Currency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 14 Figure 1. Republic of Congo: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2019–29 PV of debt-to GDP ratio PV of debt-to-exports ratio 160 350 140 300 120 250 100 200 80 150 60 100 40 20 50 Most extreme shock is Exports Most extreme shock is Exports 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Debt service-to-exports ratio Debt service-to-revenue ratio 40 45 35 40 35 30 30 25 25 20 20 15 15 10 10 5 5 Most extreme shock is Exports Most extreme shock is Exports 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Historical scenario Most extreme shock 1/ Threshold Customization of Default Settings Borrowing Assumptions for Stress Tests* Size Interactions Default User defined Shares of marginal debt No No External PPG MLT debt 100% Tailored Tests Terms of marginal debt Combined CLs Yes Avg. nominal interest rate on new borrowing in USD 1.0% 1.0% Natural Disasters n.a. n.a. USD Discount rate 5.0% 5.0% Commodity Prices 2/ No No Avg. maturity (incl. grace period) 21 21 Market Financing No No Avg. grace period 5 5 Note: "Yes" indicates any change to the size or * Note: All the additional financing needs generated by the shocks under the stress tests are interactions of the default settings for the stress tests. assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal "n.a." indicates that the stress test does not apply. debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one- off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department. 15 Figure 2. Republic of Congo: Indicators of Public Debt Under Alternative Scenarios, 2019–28 PV of Debt-to-GDP Ratio 120 100 80 60 40 20 Most extreme shock is Primary Balance 0 2019 2021 2023 2025 2027 2029 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 400 60 350 50 300 40 250 200 30 150 20 100 10 Most extreme shock is Commodity price 50 Most extreme shock is Primary Balance 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Most extreme shock 1/ Public debt benchmark Historical scenario Borrowing Assumptions for Stress Tests* Default User defined Shares of marginal debt External PPG medium and long-term 100% 100% Domestic medium and long-term 0% 0% Domestic short-term 1% 0% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 1.0% 1.0% Avg. maturity (incl. grace period) 21 21 Avg. grace period 5 5 Domestic MLT debt Avg. real interest rate on new borrowing 0.0% 0.0% Avg. maturity (incl. grace period) 1 1 Avg. grace period 0 0 Domestic short-term debt Avg. real interest rate 0.8% 0.8% * Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 16 Table 3. Republic of Congo: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29 (Percent) (In percent) Projections 1/ 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 PV of debt-to GDP ratio Baseline 52 48 46 45 42 41 40 38 36 34 32 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 52 51 48 43 39 36 33 28 21 13 4 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 52 51 52 50 48 46 45 43 41 38 36 B2. Primary balance 52 64 96 96 96 94 94 93 90 87 85 B3. Exports 52 83 142 144 144 142 142 140 132 123 116 B4. Other flows 3/ 52 60 70 70 69 68 67 65 62 58 54 B5. Depreciation 52 61 59 57 54 52 51 49 46 43 41 B6. Combination of B1-B5 52 73 79 79 77 76 75 73 69 64 61 C. Tailored Tests C1. Combined contingent liabilities 52 64 63 62 61 60 59 58 56 54 53 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 52 52 55 54 53 53 52 51 49 46 43 C4. Market Financing 52 55 52 51 48 46 44 42 40 37 35 Threshold 30 30 30 30 30 30 30 30 30 30 30 PV of debt-to-exports ratio Baseline 62 60 59 59 58 58 59 60 61 61 62 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 62 62 61 57 53 51 49 44 35 24 8 0 62 56 52 48 45 44 42 41 38 36 34 B. Bound Tests B1. Real GDP growth 62 60 59 59 58 58 59 60 61 61 62 B2. Primary balance 62 78 121 128 131 133 139 146 153 156 163 B3. Exports 62 119 255 271 277 285 299 312 316 313 315 B4. Other flows 3/ 62 74 89 93 94 96 99 103 104 103 104 B5. Depreciation 62 60 59 60 58 59 60 61 62 61 63 B6. Combination of B1-B5 62 91 83 123 124 127 131 135 137 136 138 C. Tailored Tests C1. Combined contingent liabilities 62 79 80 83 83 84 87 91 95 97 102 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 62 68 73 75 75 76 79 81 83 83 84 C4. Market Financing 62 60 59 60 59 58 59 60 60 60 61 Threshold 140 140 140 140 140 140 140 140 140 140 140 Debt service-to-exports ratio Baseline 14 12 9 8 6 4 4 6 7 6 7 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 14 12 9 8 5 3 4 5 6 5 5 0 14 12 8 7 5 3 3 4 4 4 4 B. Bound Tests B1. Real GDP growth 14 12 9 8 6 4 4 6 7 6 7 B2. Primary balance 14 12 11 12 9 7 8 12 15 15 15 B3. Exports 14 18 21 21 15 11 12 20 33 33 34 B4. Other flows 3/ 14 12 10 9 6 4 5 8 11 11 11 B5. Depreciation 14 12 9 8 6 4 4 6 7 7 7 B6. Combination of B1-B5 14 15 14 13 9 6 7 12 15 15 15 C. Tailored Tests C1. Combined contingent liabilities 14 12 10 9 6 4 5 6 7 7 7 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 14 13 10 9 7 4 5 7 9 8 9 C4. Market Financing 14 12 9 9 6 6 7 6 7 6 6 Threshold 10 10 10 10 10 10 10 10 10 10 10 Debt service-to-revenue ratio Baseline 37 32 23 19 13 8 9 10 11 10 9 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 37 31 22 17 11 7 7 9 10 8 7 0 37 30 20 16 10 6 6 7 7 6 5 B. Bound Tests B1. Real GDP growth 37 34 26 21 14 9 10 11 12 11 10 B2. Primary balance 37 32 27 26 20 15 15 20 25 23 21 B3. Exports 37 41 37 33 23 15 17 25 37 35 33 B4. Other flows 3/ 37 32 23 20 14 9 10 14 18 16 15 B5. Depreciation 37 40 29 24 16 10 11 13 14 12 11 B6. Combination of B1-B5 37 38 29 24 17 11 12 18 20 18 17 C. Tailored Tests C1. Combined contingent liabilities 37 32 24 20 13 8 9 11 11 10 10 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 37 35 25 21 14 9 10 12 14 12 12 C4. Market Financing 37 32 23 19 13 12 13 10 11 9 8 Threshold 14 14 14 14 14 14 14 14 14 14 14 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI. 17 Table 4. Republic of Congo: Sensitivity Analysis for Key Indicators of Public Debt, 2019–29 Projections 1/ 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 PV of Debt-to-GDP Ratio Baseline 74 67 61 56 50 47 45 42 39 36 33 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 74 70 67 63 61 62 63 63 62 61 60 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 74 73 73 70 66 66 67 67 67 67 67 B2. Primary balance 74 82 110 107 103 100 98 97 93 89 85 B3. Exports 74 84 105 103 99 96 95 93 87 80 74 B4. Other flows 3/ 74 79 85 81 76 73 72 69 64 59 55 B5. Depreciation 74 80 71 64 57 53 48 44 39 34 29 B6. Combination of B1-B5 74 76 82 79 75 73 72 71 69 67 65 C. Tailored Tests C1. Combined contingent liabilities 74 83 77 73 68 65 63 62 59 56 54 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 74 70 68 67 65 66 67 67 67 67 67 C4. Market Financing 74 68 62 56 51 47 44 42 39 35 33 Public debt benchmark 35 35 35 35 35 35 35 35 35 35 35 PV of Debt-to-Revenue Ratio Baseline 237 210 186 162 144 134 124 115 105 94 85 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 237 219 205 185 176 177 176 172 166 161 155 0 49 49 36 29 20 10 10 11 12 11 11 B. Bound Tests B1. Real GDP growth 237 227 223 204 191 188 186 184 180 175 172 B2. Primary balance 237 257 337 314 297 286 275 264 250 234 221 B3. Exports 237 261 322 300 285 275 266 254 233 212 192 B4. Other flows 3/ 237 246 259 236 219 209 200 189 173 156 142 B5. Depreciation 237 250 218 188 165 150 136 121 105 89 75 B6. Combination of B1-B5 237 237 252 232 216 208 201 194 185 175 167 C. Tailored Tests C1. Combined contingent liabilities 237 260 237 214 196 187 177 169 158 148 139 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 237 235 222 208 197 193 189 184 180 175 172 C4. Market Financing 237 211 188 165 146 135 124 114 104 93 84 Debt Service-to-Revenue Ratio Baseline 49 44 36 31 23 12 12 13 13 13 12 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 49 43 33 27 19 10 10 12 13 13 13 0 49 49 36 29 20 10 10 11 12 11 11 B. Bound Tests B1. Real GDP growth 49 47 40 36 26 14 14 15 17 17 16 B2. Primary balance 49 44 39 39 30 19 19 23 27 26 25 B3. Exports 49 44 37 34 25 14 14 19 26 25 23 B4. Other flows 3/ 49 44 36 33 24 13 13 17 20 19 18 B5. Depreciation 49 47 42 36 26 14 14 15 16 15 14 B6. Combination of B1-B5 49 43 39 36 27 16 16 17 17 16 15 C. Tailored Tests C1. Combined contingent liabilities 49 44 37 32 24 13 13 13 14 13 12 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 49 48 39 35 25 13 13 15 16 16 16 C4. Market Financing 49 44 36 32 23 16 16 13 13 12 11 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the benchmark. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includes official and private transfers and FDI. 18 Figure 3. Republic of Congo: Drivers of Debt Dynamics—Baseline Scenario External Debt Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) 40 100 Gross Nominal PPG Current DSA Current DSA External Debt Debt-creating Residual 40 flows 45 Unexpected Changes in Debt 1/ Previous DSA 100 90 (in percent of GDP; Previous DSA proj. DSA vintages) (percent of GDP) Residual 45 40 (past 5 years, percent of GDP) 90 DSA-2013 proj. 20 40 Interquartile range (25-75) 80 DSA-2013 Price and 20 40 35 Interquartile range Current DSA exchange rate (25-75) 80 100 70 Price and Residual 35 4530 Previous DSA 0 60 90 70 proj. exchange rate Real GDP 30 4025 60 50 DSA-2013 growth 200 25 20 Interquartile Change in range debt 3/ PPG Real GDP (25-75) 80 Price and growth -20 35 Change in PPG 40 50 exchange Nominal rate 15 20 debt 3/ 70 interest rate -20 30 30 40 0 10 15 Nominal -40 60 20 interest Real GDPrate 25 Median 30 Current 5 10 Change in PPG growth 50 10 account + FDI -40 20 0 debt 3/ Median 20 -20 5 Current -60 40 0 account 15-5 Contribution of 10 Change + Nominal inFDI PPG 5-year 5-year 0 Distribution across LICs 2/ 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 2024 2024 2025 2025 2026 2026 2027 2027 2028 2028 2029 2029 unexpected debt 3/ 300 interest rate -60 historical projected -10 10-5 changes Contribution of -40 Change in PPG change 5-year change 5-year unexpected Distribution across LICs 2/ Median 20 debt 3/ historical projected 5 -10 changes Current 10 Public Debt change Public debt account + FDI change 0 -60 0 -5 Contribution of Gross Nominal Public Debt Change Public 5-year Debt-creating in PPG debt flows 5-year Unexpected Changes Distribution in across LICs 2/ Debt 1/ 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 unexpected (in percent of GDP; DSA vintages) debt 3/ (percent of historical GDP) projected (past 5 years, percent of GDP) changes -10 Gross Nominal Current Public DSA Debt Residual Debt-creating100 change flows change Unexpected Changes in Debt 1/ proj. 150 (in percent Previous of GDP; DSA-2013 DSA DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Interquartile range 140 Other debt Current DSA Residual Public creating flows 100 debt 50 (25-75) Previous DSA proj. 150 100 120 DSA-2013 Real Exchange Interquartile range 140 100 Gross Nominal Public Debt Other Debt-creating flows rate debt Unexpected Changes in Debt (25-75) 1/ creating flows depreciation 120 (in percent of GDP; DSA vintages) (percent of50 Real GDP growth GDP) 0 100 50 (past 5 years, percent of GDP) 80 Change in debt Real Exchange Residual Current DSA rate 100 100 60 150 Previous DSA proj. depreciation Real interest rate 0 -50 0 50 DSA-2013 Real GDP growth Interquartile range 80 40 140 Other debt Change in debt (25-75) creating flows 20 60 Primary deficit 50 100 120 Real interest rate -100 -50 0 Real Exchange -50 Median 0 40 Change in debt 5-year 5-year rate 100 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Distribution across LICs 2/ depreciation Primary deficit historical projected Contribution of unexpected 20 0 change change -10050 changes 80 Real GDP growth -100 -50 Change Medianin debt 0 1/ Difference between anticipated and actual contributions on debt ratios.Change in debt 5-year 5-year 60 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Distribution across LICs 2/ 2/ Distribution across LICs for which LIC DSAs were produced. Real interest rate historical projected Contribution of unexpected -50 0 -100 changes 3/40 change change Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. 1/20 Difference between anticipated and actual contributions on debt ratios. Sources: Congolese authorities and IMF staff projections. Primary deficit 2/ Distribution across LICs for which LIC DSAs were produced. -100 -50 Median 0 Change in debta ppt change 5-year 5-year 3/ Given the relatively low private external debt for average low-income countries, in PPG external debt should be largely explained Distribution by the drivers of the 2/ external debt 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 across LICs dynamics equation. historical projected Contribution of unexpected -100 changes change change 1/ Difference between anticipated and actual contributions on debt ratios. 2/ Distribution across LICs for which LIC DSAs were produced. 3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. 19 Figure 4. Republic of Congo: Realism Tools 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Path (Percentage points of GDP) Fiscal Adjustment and Possible Growth Paths Distribution 1/ 8 0.6 14 0.5 Projected 3-yr 6 In percentage points of GDP 12 0.4 adjustment 3-year PB adjustment greater than 2.5 percentage points of GDP in 4 0.3 10 approx. top quartile In percent 0.2 2 8 0.1 0 0 6 -0.1 -2 4 -0.2 -4 -0.3 2 2013 2014 2015 2016 2017 2018 2019 2020 0 Fiscal adjustment (right axis) Baseline 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 More Public and Private Investment Rates Contribution to Real GDP growth (Percent of GDP) (Percent, 5-year average) Contribution to Real GDP growth Public and Private Investment Rates (percent, 5-year average) (% of GDP) 60 2.5 2.0 40 1.5 1.0 0.5 20 0.0 Historical Projected (Prev. Projected (Curr. -0.5 DSA) DSA) 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Contribution of other factors Gov. Invest. - Prev. DSA Gov. Invest. - Curr. DSA Priv. Invest. - Prev. DSA Priv. Invest. - Curr. DSA Contribution of government capital (G) Sources: Congolese authorities and IMF staff estimates. 1/ Data cover Fund-supported programs for LICS (excluding emergency financing) approved since 1990. The size of 3-year adjustment for program inception is found on the horizontal axis, the percent of sample is found on the vertical axis. 20 Figure 5. Republic of Congo: Market-Financing Risk Indicators GFN 1/ EMBI 2/ Benchmarks 14 570 Values 6 1250 Breach of benchmark No Yes Potential heightened liquidity needs Moderate 1/ Maximum gross financing needs (GFN) over 3-year baseline projection horizon. 2/ EMBI spreads correspond to the latest available data. 60 PV of debt-to GDP ratio PV of debt-to-exports ratio 160 50 140 120 40 100 30 80 20 60 40 10 20 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Debt service-to-exports ratio Debt service-to-revenue ratio 16 40 14 35 12 30 10 25 8 20 6 15 4 10 2 5 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Market financing Threshold Sources: Congolese Sources: authorities; Country and IMF authorities; staffestimates andstaff estimatesand projections. and projections. 21