4. Debt Sustainability Assessment in Egypt and Tunisia
4.2 Debt sustainability assessment for Tunisia
4.3.3 Assumptions for the realistic scenario
Under this scenario, we try to identify the most probable future situation, given the constraints of the current economic and political environment.
Real GDP growth rate assumptions
The lingering insecurity and political instability remaining in Egypt in 2013 are not at all promising in terms of returning tourism flows or growing economic activity, so during the year we expect that the economy will perform only as well as it did in 2012 (i.e. a growth rate of 1.96% versus the projected 3.03% in WEO 2013). Next, we project slow recovery and add an extra 1% of GDP growth each year – 3% for 2014 and 4% for 2015. With this first assumption and all other variables kept at their ‘baseline WEO 2013’
levels, the debt-to-GDP ratio reaches 77.1%.
61
112,8
98,8 87,1
76,6 75,9 74,4 76,2 80,5 80,1
77,2 73,8
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Baseline WEO 2010
GDP deflator assumptions
We believe that the WEO 2013 data are acceptable as realistic, especially taking into consideration the recent depreciation of the Egyptian pound, which might put upward pressures on deflator inflation.
Government revenues assumptions
First, we expressed the revenues as a percentage of GDP. Next, we adjusted the forecasts by assuming that 2013 will be identical to 2012 and that revenues will start picking up slowly afterwards to reach 23.5% of GDP in 2014 and 25% in 2015 – the same level it had in 2010 before the revolution.
Accordingly, the debt-to-GDP ratio keeps on rising to 83.2%.
Government total expenditures assumptions
Given the strong social tensions, numerous strikes and active social justice claims, we believe the government will find it very hard to cut expenditures drastically. Thus, since expenditures rose by 10.1% in 2011 and by 17.3% in 2012, we expect them to grow at a slower pace of 15.7% in 2013 (the average growth between 2003 and 2010), slowing even further to 14.7% in 2014 and 13.7% in 2015. The budget deficit in this case will climb to 11.5% of GDP in 2013, and will then decline to 10.6% in 2014 and further to 9.2% in 2015. The effect on the debt-to-GDP ratio is a further increase to 84.9% in 2015.
Interest rate assumptions
We replicated the evolution of interest rates on Treasuries between 2010 and 2013, and then assumed rates will remain constant until 2015. The debt-to-GDP ratio continues rising to reach 89.5% in 2015.
Exchange rate assumptions
The exchange rate has been under serious pressure since the revolution and the depletion of the official reserves, pushing the central bank to allow the Egyptian pound to depreciate continuously – reaching 6.85 pounds per dollar on 10 April 2013 (the black market has a much higher rate that we will consider in the pessimistic scenario). Our final realistic scenario forecast for the debt-to-GDP ratio is 91.1% in 2015, as presented in Figure 4.24.
Figure 4.24 Egypt’s realistic scenario
Source: Authors’ own calculations.
4.3.4 Assumptions for the optimistic scenario
We start this simulation using the realistic scenario (presented in Figure 4.24 above) as ‘initial input’ for our template and graphs.
Real GDP growth rate assumptions. Should the economic situation stabilise promptly, the political situation clarifies and peaceful parliamentary elections create a stable government, this will improve the country’s attractiveness and generate growth. Thus, our projections are for growth of 2.5% in 2013, 3.5% in 2014 and 5% in 2015. The debt-to-GDP ratio improves to 88.5% in 2015 instead of 91.1% in the realistic scenario.
GDP deflator assumptions. Although higher growth could have implied slightly higher inflation, we believe that the current under-utilisation of economic resources will control the inflationary pressures, so we keep the data equivalent to that in the baseline and the realistic scenario, leaving the debt ratio unchanged at 88.5% at the end of the period.
Government revenue assumptions. If we assume that the government will be able to improve tax collection and toughen tax evasion laws, we could expect budget revenues equal to 23% of GDP in 2013, 24.5%
in 2014 and 26% in 2105. This will further improve the debt-to-GDP ratio to 86% by 2015.
Government total expenditures assumptions. If the government is able to successfully tackle the issues with the food and energy subsidies, if it can limit waste and rationalise and optimise fiscal spending, we expect expenditures to grow at a slower pace of 14% in 2013, slowing even further to 13% in 2014 and 12% in 2015. As a percentage of GDP, these
61
112,8
98,8
87,1
76,6 75,9 74,4 76,2 80,5 80,1
77,2 73,8
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Baseline WEO 2010
expenditures will amount to respectively 33.3% in 2013 (down from 33.6%
in 2012), 32.8% in 2014 and 32.1% in 2015. This would reduce the budget deficit from 10.3% in 2013, to 8.3% in 2014 and to 6.1% in 2015. Finally, the debt-to-GDP ratio will thus fall to 83.1% by the end of the forecast period.
Interest rate assumptions. Due to an improved security climate, we can expect the cost of borrowing to be one percentage point lower in 2013 and remain stable over the forecast period, resulting in a debt-to-GDP ratio of 82.1% by 2015.
Exchange rate assumptions. We have no reason to believe that the exchange rate will appreciate in the coming three years, so we shall keep the data the same as in the realistic scenario.
Figure 4.25 Egypt’s optimistic scenario
Source: Authors’ own calculations.
Thus, the final debt-to-GDP ratio optimistic forecast presented in Figure 4.25 is for 82.1% by 2015, which is still higher than the WEO 2013 baseline projection of 73.8%, confirming our intuition that the IMF forecasts are overly optimistic.
4.3.5 Assumptions for the pessimistic scenario
Coming back to the realistic scenario (Figure 4.24) as ‘initial conditions’ for our last simulation, we first adjust lower our real GDP growth rate assumptions to keep growth at 1.8% in 2013, 2% in 2014, allowing it only to pick up to 3% in 2015. Compared to our realistic scenario, this increases the debt-to-GDP ratio by more than 2.5 points to 93.8%.
GDP deflator assumptions. Even if the lower GDP growth would cause lower pressure on factors of production, this downward pressure on
61 112,8
98,8 87,1
76,6 75,9 74,4 76,2 80,5 80,1
77,2 73,8
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
p
prices will be offset by the assumption that the exchange rate will further depreciate during 2013-14. Thus, we shall again keep the realistic scenario data, which reproduced the WEO 2013.
Government revenues assumptions. Revenues will grow at a slower pace than in the realistic scenario at 13.5% annually (the average growth rate for the 2002-10 period; equivalent to the 2012 growth rate). This results in revenues as a share of GDP of respectively 22.3%, 22.4% and 22.6% for 2013-15, which corresponds to the projected GDP growth rates and is a fair assumption. The value of debt approaches dangerously the value of national output with 97.4% by 2015.
Government total expenditures assumptions. Because of even stronger claims for more social justice, salary adjustments, infrastructure projects, etc., the government might be unable to keep its expenditures under control given the imminent threat of social unrest. Thus, for 2013 we project the same growth rate as 2012 of 17.3% (resulting in an expenditures-to-GDP ratio of 34.5%). For 2014 and 2015, we input the same growth rate as the average between 2002 and 2010 of 15.7%, giving a ratio growth-to-GDP of 35.4% and 36.4% respectively. Accordingly, the budget deficit will reach 12.2% in 2013, 12.9% in 2014, and 13.7% in 2015. The debt will reach the dangerous threshold of 100% in 2015.
Interest rate assumptions. The higher budget deficit will lead to private investment crowding out and upward pressure on interest rates.
We will look at three sub-scenarios as a sensitivity test:
Interest rates are 1% point (100 basis points) higher in 2013 and constant in 2014 and 2015; this gives us a debt-to-GDP ratio of 102.3%
in 2015.
Interest rates are 1% point higher in 2013 and additional 1% point higher in 2014, stabilising in 2015; debt-to-GDP is at 104% in 2015.
Interest rates are 1% point higher in 2013, an additional 1% point higher in 2014 and an additional 1% point higher in 2015 = 104.8% in 2015.
The first and third scenarios are presented in Figure 4.26.
Figure 4.26 Egypt’s pessimistic scenario – Interest rate simulations
Source: Authors’ own calculations.
Exchange rate assumptions. Keeping the intermediary interest rate scenario 2 (104% debt-to-GDP ratio), we decide to explore again three alternatives (from the least to the most pessimistic):
The exchange rate will first depreciate by 20% by the end of 2013 as compared to the 2011 level to reach 7.25 pounds per dollar and remain stable at this level in 2014 and 2015. Debt reaches 105.1% of GDP in 2015.
The actual level of the exchange rate catches up with the rate on the black market, which in the first week of April 2013 is 8 pounds per dollar. It remains at this level for the three projection years. Debt climbs further to 107.5% of GDP.
Speculation and more pressure cause the exchange rate to depreciate even further than the current black market rate to reach 8.4 pounds per dollar in 2013, and 9 pounds per dollar in 2014 and 2015. The debt-to-GDP ratio explodes at 110.3% in 2015.
112,8
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Interest rates +1% annually
Figure 4.27 Egypt’s pessimistic scenario – Exchange rate simulations
Source: Authors’ own calculations.
No matter which of the three exchange rate sub-scenarios we might choose, the pessimistic outcome for the Egyptian debt-to-GDP ratio indicates it will go above 105% only two and a half years from the time of writing (see Figure 4.27).