Sovereign Debt Sustainability Framework

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QUESTION

Read the word document of instruction that attached below, noticed in this exercise, you should choose China as your country. Finish the input 1, 2 &3 (Also reading the input instruction and fill the yellow-shaded cells in excel) and summary them in the document, be able to clarify where you get those data.
The IMF has developed a formal debt sustainability framework (DSF) spreadsheet that is used in its normal country assessments. The complete IMF version of that spreadsheet has been posted for use in this problem set. Examples of IMF DSF results are available in the country Article IV Consultation papers found at IMF.org. Data can be downloaded directly from the IMF FSI website. http://data.imf.org/?sk=51B096FA-2CD2-40C2-8D09-0699CC1764DA&sId=1390030341854
The spreadsheet has a set of 12 tabs/sheets. The sheet labeled “Input- Instructions” provides fairly detailed instructions on what is needed to complete the analysis. Note that in this problem set we will assume that every country is “Lower Scrutiny” and has “Market Access”, which makes the analysis a bit easier as we only need to use the Basic DSF Module. Read these instructions carefully.
The IMF model is using macroeconomic variables. Essentially, the user needs to project a set of economic indicators (for example GDP, interest rates and the exchange rate) which then are translated into fiscal revenues and expenditures (including debt service) and a net demand for funding (debt). The result is a projection of debt/GDP. To the extent that the ratio is growing over time, debt sustainability becomes an issue. The model has value only if its underlying assumptions, the projections, have value. For that reason, stress tests of those assumptions are an important part of the exercise.
Input 1-Basics is mostly basic information to classify the country for IMF management and document some basic parameters for the data analysis. Note that the choice of country (you should choose China as your country) in this sheet has no impact on the model in the other sheets. So, the fact that your country is not a viable choice is not a problem. The choice of country has an impact only on select variables displayed in this sheet, making it a sort of cover page used in IMF reporting.
Input 2-Data/Input 3 – Debt and Banking: Notes on the individual cells can be very helpful and point to specific IMF International Financial Statistics (IMF IFS) data that can be used; for example rows 22-23 in Debt and Banking.  IMF IFS and Article IV papers data will be helpful for many rows, but historical data (2002-2014) can also be obtained from a variety of sources, although make sure that there is consistency in the currency units used. Note that column C in the sheet provides comments that are helpful and indicate which rows are not needed or can be filled with zeros in many cases.  Also note that currency varies by row and in some cases is % GDP. For the projections (2015-2019) you will need to make assumptions about growth in each of the variables. This is where judgement is critical as it will determine the outcome of the analysis. Some of the variables may come from the data you collected in Data Exercise 1.( see attached)
Row 23 – Public Sector Principal Payments – is where the data start to get challenging. The World Bank has compiled a Global Financial Development database which includes data on “Outstanding domestic public debt securities to GDP (%)” and “Outstanding international public debt securities to GDP (%)”, which I recommend as a source for the Input 3 – Debt and Banking rows 11 and 13, although IMF IFS data may also be available for some countries (see notes on those cells).  These do not allow a decomposition into short- and long-term, but other sources (which will be country specific) may provide that information. With the totals and an assumption on the maturity structure, one can approximate the annual principal payments for row 23 (Input 2 sheet).  Note that we are assuming here that domestic debt is local currency denominated, which may be incorrect and can be adjusted if needed.  As annoying as these data problems are, they are the reality of sovereign debt analysis. Private credit by deposit money banks and other financial institutions to GDP (%) is also available from the WB GFD database for row 22

Estimate of REER overvaluation (in percent): Should be available in the IMF Article IV paper.
Sovereign risk rating: These are for reference only and is not included in the model
Market information: These are for reference only and is not included in the model
Scale of macroeconomic and fiscal variables: Important that all scales are appropriate

Input 2 – Data: Importantly, note that each line includes a set of projects for the years beyond 2014. Here is where your judgement becomes critical as the projections will determine the path of borrowing needs.
GDP at constant prices (level): Available from IMF IFS
GDP deflator (level): Available from IMF IFS
GDP at current prices (level): Available from IMF IFS
Potential GDP at current prices (level): Not required for this exercise
Nominal exchange rate (national currency per US dollar) – average: Available from IMF IFS
Nominal exchange rate (national currency per US dollar) — end of period: Available from IMF IFS
Real exchange rate index (national currency per U.S. Dollar): Available from IMF IFS
Public sector revenues and grants: The sum of the following two subcomponents; if you can’t find the two subcomponents, assign all revenues to one of them and leave the second zero. The IMF Article IV paper for each country should have this, although you may have to look at a few reports to get the entire history.
Public sector non-interest revenues and grants
Public sector interest revenues
Public sector expenditures: The sum of the following two subcomponents; treat similar to revenues
Public sector non-interest expenditures
Public sector interest expenditures (historical only)
Public sector interest expenditures denominated in local currency (historical only): Unlikely you will have access to this so assign zero value
Public sector interest expenditures denominated in foreign currency (historical only): unlikely you will have access to this so assign zero value
Public sector principal payments (historical only): If this is unavailable, assume an average maturity structure on the outstanding debt and use the annual principal payment implied by that assumption
Public sector debt service (sum of interest and amortization payments; historical only)
Cyclically-adjusted primary balance: The primary balance is revenues minus expenditures (excluding principal and interest payments). The IMF reports a cyclically-adjusted balance for many countries in its Fiscal Monitor.
Recognition of implicit contingent liability: I am not requiring a contingent liability exercise, but you are free to include this if you have reason to believe that it is important and have estimates of the costs.
Please specify (1) (e.g., privatization receipts) (+ reduces financing needs): Optional, but privatization receipts could be important for some countries
Please specify (2) (e.g., other debt flows) (+ increases financing needs)

Input  3 – Debt and Banking: It should be easy to get measures of external debt (IMF Article IV or World Bank Global Development Finance), and the BIS in its annual report (statistical Annex) and IMF Fiscal Monitor report data on total government debt, but domestic debt will likely have to come from a domestic source, likely the central bank, although you can try to contact the IMF country economist and explain what you are trying to do and he/she might help. The breakdown between long and short term and foreign/domestic currency is not as important as the interest rate on the total debt stock, which you might have to estimate using the interest payments divided by average outstanding principal.
Historical Debt Data
Stock of total public debt: Sum of the following two subcomponents
Short-term debt
Long-term debt
Denominated in local currency
Denominated in foreign currency
Domestic debt (held by residents): Reference data only
External debt (held by non-residents): Reference data only
Banking Sector Data
Banking system assets (excluding claims on government): Sum of the following two subcomponents; Article IV and IFS both should contain these data
Private sector credit
Bank gross foreign assets
Loan-to-deposit ratio: Reference data only

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