## DEBT DYNAMICS IN SAN MARINO ## Source details **Canonical URL:** [DEBT DYNAMICS IN SAN MARINO](https://www.imf.org/-/media/files/publications/cr/2018/cr18102.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18102.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18102.pdf.json) --- ### Background - San Marino ran fiscal surpluses of 1 to 3 percent of GDP before 2008–09, which built buffers and led to gross debt around 15 percent of GDP. - At the onset of the global financial crisis buffers were drawn and a deficit emerged; by 2016 public debt was 23 percent of GDP. - In 2016: - Total government revenue ≈ 20 percent of GDP; total government expenditure ≈ 20 percent of GDP. - Budget deficit was 0.3 percent of GDP. - Interest payments were around 0.3 percent of GDP and accounted for 1.4 percent of government revenue. - Debt composition (2016): - Around 75 percent financed through longer term loans. - Net account payables ≈ 20 percent of the debt stock. - Short-term loans ≈ 5 percent. - Debt predominantly issued to domestic investors. - The government committed to amortize the 2016 loss of the state-owned bank Cassa di Risparmio della Repubblica di San Marino (CRSM), described as a 2016 loss of 36 percent of GDP, over the next 25 years. Ongoing Asset Quality Review (AQR) may revise recapitalization needs. ### Considerations for Debt Sustainability - A high level of debt could constrain the government’s ability to support growth and provide social safety nets when negative shocks hit. - A temporary increase in debt can be sustainable if coupled with a credible adjustment plan to reach an appropriate target without relying on overly ambitious revenue or spending paths. - Determining an appropriate debt target depends on growth, financing costs, access to markets, and economic diversification. - Reference thresholds used by the IMF for other countries: - Advanced Economies: 85 percent of GDP (risk of elevated debt distress above this). - Emerging Markets: 70 percent of GDP. - These thresholds may not be appropriate for San Marino given its untested market access; assessment should focus on interest burden and size of adjustments associated with various debt levels. - The government included adjustment measures in the 2018 budget to contain the rise in the debt-to-GDP ratio. - Developing in-house capacity to conduct debt sustainability assessments is important to set a medium-term fiscal framework and a debt-to-GDP target. ### Scenario Analysis - Baseline macro-fiscal assumptions: - Nominal (real) growth: 2.9 (1.3) percent in 2018, settling at 2.7 (1.3) percent in the medium term. - Overall fiscal balance: -0.3 percent of GDP in 2018, reaching 0.6 percent in 2020. - Average interest rate: around 2 percent. - Baseline assumes measures in the 2018 budget, including extraordinary taxes and some current spending cuts. - CRSM loss and government treatment in analysis: - CRSM booked €54 million loss in 2016 out of a full €536 million loss (Decree-Law 101 allows banks to spread losses over up to 30 years). - Government initially announced amortizing the full loss over 25 years. - €41 million out of €54 million was addressed by conversion of hybrid bonds into equity; remaining roughly €490 million (30 percent of GDP) is treated as new public debt in 2017 for the analysis. - Table of estimated fiscal cost of banking sector repair (staff calculations, based on current information): - CRSM capital injection: 131 (€ million) — note: €13 million out of the EUR54 CRSM recapitalization need in 2017 is planned to be met by capital injection by the government. - CRSM legacy loss: 480 (30 percent of GDP) — note: €480 (=534-54) is initially announced to be amortized over 25 years by the government. - Subtotal: 493 (31 percent of GDP). - Contingent liability (estimate) from Bank Decree-Law 93: 300 (20 percent of GDP) — estimated amount of potential conversion of tax credits into government bonds. - Total: 793 (51 percent of GDP). - Note: Total final costs are highly uncertain. - Scenario results: - Scenario 0 (no loss): baseline debt path (reference). - Scenario 1 (government assumes CRSM full loss): public debt increases to 57 percent of GDP in 2017 (about 30 percentage points higher than Scenario 0) and gradually declines to 52 percent of GDP by the end of the projection period. - Scenario 2 (contingent liabilities materialize via conversion of tax credits): debt ratio increases further to about 70 percent of GDP and remains around that level by the end of the projection period. - Shock analyses on Scenario 1: - A growth shock of one standard deviation (5 percentage points) for two years could raise the debt ratio to 65 percent of GDP. - An increase in funding costs of 300 basis points during the projection period would increase the debt ratio to 55 percent of GDP and put it on an upward trajectory. - A combined shock to contingent liabilities, growth, and funding costs could raise the debt ratio to around 90 percent of GDP. - Uncertainty: projections are subject to substantial uncertainty depending on final bank capital shortfalls, modalities for recapitalization, and possible positive revisions of CRSM asset values. ### Developing a Fiscal Strategy - Rising public debt increases the need for strengthened debt management capacity and in-house debt sustainability analysis. - A medium-term fiscal framework should: - Set a debt-to-GDP target taking into account growth prospects, financing costs, and market access. - Calibrate necessary fiscal adjustments to reach the target without relying on unrealistic revenue or expenditure paths. - The government has already included adjustment measures in the 2018 budget to limit the debt rise; further policy design should prioritize feasibility and credibility. ### Fiscal risks and debt projections (Section 2) - Debt-to-GDP ratio could rise to 55–90 percent of GDP according to the scenario analysis. - A debt ratio higher than 85 percent of GDP would be above the threshold for which the risk of debt distress is deemed to be elevated for AEs (IMF, 2013). - A debt ratio in the interval of 55–90 would imply interest payments of 4–13 percent of revenue by 2020. - The government’s commitment to cover the 2016 loss made by CRSM will increase the debt-to-GDP ratio by around 30 percent of GDP. - The government has granted banks the right to convert tax credits to government bonds, creating contingent liabilities. ### Government deposits and fiscal buffers (Section 2) - Government deposits declined from around eight months of spending in end-2009 to below one month of spending in end-2017. - The standard yardstick for fiscal reserve buffer is one month cover of spending (Wiegand, 2013); San Marino’s deposits are slightly below that yardstick. - Given limited market access and a relatively large financial sector, rebuilding government deposits should be a key consideration. ### Medium-term fiscal strategy, required adjustments, and uncertainties (Section 2) - A medium-term fiscal strategy could set a target for the debt-to-GDP ratio and an associated target for government deposits, and then determine the fiscal consolidation needed to reach them by 2022. - Illustrative example: to reach a debt-to-GDP ratio of 50 percent and deposit cover of three months of spending by 2022, the government would need to consolidate by 1.1 percent of GDP vis-à-vis Scenario 1. - Reforms that support growth will help reduce debt ratios and lower the required consolidation. - Uncertainties and sensitivity of required consolidation: - Realization of contingent liabilities could substantially raise the required consolidation to achieve a given debt-to-GDP level by 2022. - The impact of consolidation on growth matters; a higher negative impact on growth would increase the needed adjustment. The analysis assumed no impact on the path of GDP for simplicity. - A lower (higher) growth path raises (lowers) the required consolidation. - Higher funding costs would also raise the required consolidation. - Scenario analysis tables and sensitivity exercises illustrate variation in required consolidation under shocks such as contingent liabilities, one standard deviation lower growth, and 300 basis points higher interest rates. ### Conclusions and policy implications - San Marino’s low pre-crisis debt (around 15 percent of GDP) and prudent fiscal history resulted in public debt of 23 percent of GDP in 2016 and low interest payments. - Bank recapitalization needs—most notably the CRSM legacy loss—are the primary driver of a substantial projected increase in public debt (to 57 percent under the baseline assumption that the government covers the full loss). - Contingent liabilities (estimated at 20 percent of GDP) and adverse shocks could raise debt further (up to around 70 percent under conversion of tax credits, and up to around 90 percent under a combined shock scenario). - Policy aim: contain the debt-to-GDP ratio and rebuild government deposits to restore fiscal buffers and confidence. - Key components of a medium-term fiscal strategy: - Determine a sustainable target debt-to-GDP ratio well below the 85 percent threshold identified for elevated debt-distress risk. - Establish an associated target for government deposit cover (months of spending) and a consolidation path to reach both debt and deposit targets by 2022. - Incorporate reforms to support growth to reduce debt ratios and lower consolidation needs. - Account for contingent liabilities and potential higher funding costs in calibration of fiscal adjustments. *Prepared by Niels-Jakob Hansen and Jingzhou Meng; IMF staff calculations and analysis (March 6, 2018).* ### Section 1 ### DEBT DYNAMICS IN SAN MARINO ### Background - San Marino ran fiscal surpluses of 1 to 3 percent of GDP before 2008–09, which built buffers and led to gross debt around 15 percent of GDP. - At the onset of the global financial crisis buffers were drawn and a deficit emerged; by 2016 public debt was 23 percent of GDP. - In 2016: - Total government revenue ≈ 20 percent of GDP; total government expenditure ≈ 20 percent of GDP. - Budget deficit was 0.3 percent of GDP. - Interest payments were around 0.3 percent of GDP and accounted for 1.4 percent of government revenue. - Debt composition (2016): - Around 75 percent financed through longer term loans. - Net account payables ≈ 20 percent of the debt stock. - Short-term loans ≈ 5 percent. - Debt predominantly issued to domestic investors. - The government committed to amortize the 2016 loss of the state-owned bank Cassa di Risparmio della Repubblica di San Marino (CRSM), described as a 2016 loss of 36 percent of GDP, over the next 25 years. Ongoing Asset Quality Review (AQR) may revise recapitalization needs. ### Considerations for Debt Sustainability - A high level of debt could constrain the government’s ability to support growth and provide social safety nets when negative shocks hit. - A temporary increase in debt can be sustainable if coupled with a credible adjustment plan to reach an appropriate target without relying on overly ambitious revenue or spending paths. - Determining an appropriate debt target depends on growth, financing costs, access to markets, and economic diversification. - Reference thresholds used by the IMF for other countries: - Advanced Economies: 85 percent of GDP (risk of elevated debt distress above this). - Emerging Markets: 70 percent of GDP. - These thresholds may not be appropriate for San Marino given its untested market access; assessment should focus on interest burden and size of adjustments associated with various debt levels. - The government included adjustment measures in the 2018 budget to contain the rise in the debt-to-GDP ratio. - Developing in-house capacity to conduct debt sustainability assessments is important to set a medium-term fiscal framework and a debt-to-GDP target. ### Scenario Analysis - Baseline macro-fiscal assumptions: - Nominal (real) growth: 2.9 (1.3) percent in 2018, settling at 2.7 (1.3) percent in the medium term. - Overall fiscal balance: -0.3 percent of GDP in 2018, reaching 0.6 percent in 2020. - Average interest rate: around 2 percent. - Baseline assumes measures in the 2018 budget, including extraordinary taxes and some current spending cuts. - CRSM loss and government treatment in analysis: - CRSM booked €54 million loss in 2016 out of a full €536 million loss (Decree-Law 101 allows banks to spread losses over up to 30 years). - Government initially announced amortizing the full loss over 25 years. - €41 million out of €54 million was addressed by conversion of hybrid bonds into equity; remaining roughly €490 million (30 percent of GDP) is treated as new public debt in 2017 for the analysis. - Table of estimated fiscal cost of banking sector repair (staff calculations, based on current information): - CRSM capital injection: 131 (€ million) — note: €13 million out of the EUR54 CRSM recapitalization need in 2017 is planned to be met by capital injection by the government. - CRSM legacy loss: 480 (30 percent of GDP) — note: €480 (=534-54) is initially announced to be amortized over 25 years by the government. - Subtotal: 493 (31 percent of GDP). - Contingent liability (estimate) from Bank Decree-Law 93: 300 (20 percent of GDP) — estimated amount of potential conversion of tax credits into government bonds. - Total: 793 (51 percent of GDP). - Note: Total final costs are highly uncertain. - Scenario results: - Scenario 0 (no loss): baseline debt path (reference). - Scenario 1 (government assumes CRSM full loss): public debt increases to 57 percent of GDP in 2017 (about 30 percentage points higher than Scenario 0) and gradually declines to 52 percent of GDP by the end of the projection period. - Scenario 2 (contingent liabilities materialize via conversion of tax credits): debt ratio increases further to about 70 percent of GDP and remains around that level by the end of the projection period. - Shock analyses on Scenario 1: - A growth shock of one standard deviation (5 percentage points) for two years could raise the debt ratio to 65 percent of GDP. - An increase in funding costs of 300 basis points during the projection period would increase the debt ratio to 55 percent of GDP and put it on an upward trajectory. - A combined shock to contingent liabilities, growth, and funding costs could raise the debt ratio to around 90 percent of GDP. - Uncertainty: projections are subject to substantial uncertainty depending on final bank capital shortfalls, modalities for recapitalization, and possible positive revisions of CRSM asset values. ### Developing a Fiscal Strategy - Rising public debt increases the need for strengthened debt management capacity and in-house debt sustainability analysis. - A medium-term fiscal framework should: - Set a debt-to-GDP target taking into account growth prospects, financing costs, and market access. - Calibrate necessary fiscal adjustments to reach the target without relying on unrealistic revenue or expenditure paths. - The government has already included adjustment measures in the 2018 budget to limit the debt rise; further policy design should prioritize feasibility and credibility. ### Conclusions - San Marino’s low pre-crisis debt (around 15 percent of GDP) and prudent fiscal history resulted in public debt of 23 percent of GDP in 2016 and low interest payments. - Bank recapitalization needs—most notably the CRSM legacy loss—are the primary driver of a substantial projected increase in public debt (to 57 percent under the baseline assumption that the government covers the full loss). - Contingent liabilities (estimated at 20 percent of GDP) and adverse shocks could raise debt further (up to around 70 percent under conversion of tax credits, and up to around 90 percent under a combined shock scenario). - Given these risks, enhancing debt management capacity, conducting regular debt sustainability assessments, and formulating a credible, feasible medium-term fiscal adjustment strategy are priorities. *Prepared by Niels-Jakob Hansen and Jingzhou Meng; IMF staff calculations and analysis (March 6, 2018).* ### Section 2 ### cr18102 - Section 2 ### Fiscal risks and debt projections - Debt-to-GDP ratio could rise to 55–90 percent of GDP according to the scenario analysis. - A debt ratio higher than 85 percent of GDP would be above the threshold for which the risk of debt distress is deemed to be elevated for AEs (IMF, 2013). - A debt ratio in the interval of 55–90 would imply interest payments of 4–13 percent of revenue by 2020. - The government’s commitment to cover the 2016 loss made by CRSM will increase the debt-to-GDP ratio by around 30 percent of GDP. - The government has granted banks the right to convert tax credits to government bonds, creating contingent liabilities. ### Government deposits and fiscal buffers - Government deposits declined from around eight months of spending in end-2009 to below one month of spending in end-2017. - The standard yardstick for fiscal reserve buffer is one month cover of spending (Wiegand, 2013); San Marino’s deposits are slightly below that yardstick. - Given limited market access and a relatively large financial sector, rebuilding government deposits should be a key consideration. ### Medium-term fiscal strategy and required adjustments - A medium-term fiscal strategy could set a target for the debt-to-GDP ratio and an associated target for government deposits, and then determine the fiscal consolidation needed to reach them by 2022. - Illustrative example: to reach a debt-to-GDP ratio of 50 percent and deposit cover of three months of spending by 2022, the government would need to consolidate by 1.1 percent of GDP vis-à-vis Scenario 1. - Reforms that support growth will help reduce debt ratios and lower the required consolidation. ### Uncertainties and sensitivity of required consolidation - Fiscal adjustments needed to attain a medium-term target are subject to uncertainty, including: - Realization of contingent liabilities could substantially raise the required consolidation to achieve a given debt-to-GDP level by 2022. - The impact of consolidation on growth matters; a higher negative impact on growth would increase the needed adjustment. The analysis assumed no impact on the path of GDP for simplicity. - A lower (higher) growth path raises (lowers) the required consolidation. - Higher funding costs would also raise the required consolidation. - Scenario analysis tables and sensitivity exercises illustrate variation in required consolidation under shocks such as contingent liabilities, one standard deviation lower growth, and 300 basis points higher interest rates. ### Conclusions and policy implications - San Marino faces new fiscal challenges from recent financial-sector interventions that are set to increase public debt, but the eventual level of public debt remains highly uncertain. - Policy aim: contain the debt-to-GDP ratio and rebuild government deposits to restore fiscal buffers and confidence. - Key components of a medium-term fiscal strategy: - Determine a sustainable target debt-to-GDP ratio well below the 85 percent threshold identified for elevated debt-distress risk. - Establish an associated target for government deposit cover (months of spending) and a consolidation path to reach both debt and deposit targets by 2022. - Incorporate reforms to support growth to reduce debt ratios and lower consolidation needs. - Account for contingent liabilities and potential higher funding costs in calibration of fiscal adjustments. *Source: cr18102 - Section 2 (IMF staff calculations and analysis).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18102.pdf_