## _cr16111

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### Context, outlook, and risks
- Economy:
  - "bottoming out after six years of recession"; loss of "a third of San Marino’s output."
  - Modest recovery of "about 1 percent in 2015"; projected "Modest growth of 1–1¼ percent" for 2016 and the medium-term.
- Banking impact and financial sector headwinds:
  - Nonperforming loans increased to "close to 46 percent of loans."
  - Bank assets declined from "over 600 percent of GDP in 2008 to about 400 percent in 2015."
- External and structural risks:
  - Downside: "Prolonged slow growth in Italy" and the euro area.
  - Upside: inclusion in Italy’s whitelist.
  - Structural constraints: Very small size, capacity constraints, skills shortages, gaps in macroeconomic statistics (no balance of payments data; national accounts published with a one-year lag), not a member of the EU or the Eurosystem (no lender-of-last-resort).
- Authorities’ view:
  - Agree on slow return to growth; emphasize short-term costs of complying with international best practice.
  - Committed to increasing economic flexibility and diversification; noted capacity bottlenecks in state administration and CBSM.

### Key macroeconomic and social indicators (selected exact figures)
- GDP per capita (2013): 56,112 U.S. dollars
- Life expectancy at birth (2010): 83.2 years
- Population (December 2013): 31,460 persons
- Literacy, adult (2008): 96 percent

Projection table highlights (2012–16)
- Real GDP (percent change): 2012 -7.5; 2013 -4.5; 2014 -1.0; 2015 1.0; 2016 1.1
- Employment (percent change): 2012 -2.6; 2013 -1.3; 2014 -0.8
- Unemployment rate (average; percent): 2012 6.9; 2013 8.1; 2014 8.7
- Inflation rate (average; percent): 2012 2.8; 2013 1.3; 2014 1.1; 2015 0.4; 2016 0.9
- Nominal GDP (millions of euros): 2012 1401.5; 2013 1357.1; 2014 1343.5; 2015 1363.3; 2016 1392.1

Public finances (percent of GDP, central government)
- Revenues: 2012 20.4; 2013 20.3; 2014 22.1; 2015 21.5; 2016 21.5
- Expenditure: 2012 23.0; 2013 21.8; 2014 23.2; 2015 22.7; 2016 22.8
- Overall balance: 2012 -2.7; 2013 -1.5; 2014 -1.1; 2015 -1.1; 2016 -1.2
- Government debt: 2012 15.4; 2013 21.6; 2014 22.9; 2015 23.7; 2016 24.4
  - Loans: 2012 7.1; 2013 14.3; 2014 14.9; 2015 15.8; 2016 16.7
  - Net account payables: 2012 8.3; 2013 7.3; 2014 8.0; 2015 7.9; 2016 7.8
- Government deposits (millions of euros): 2012 72.9; 2013 55.9; 2014 40.4; 2015 45.0; 2016 45.0

Financial soundness indicators (latest available / 2014)
- Regulatory capital to risk-weighted assets: 2009 8.8; 2013 13.6; 2014 13.0
- Bad loans to total loans: 2009 9.6; 2013 13.9; 2014 15.3
- Loan loss provision to total loans (based on total loan loss provision): 2009 13.3; 2013 11.5; 2014 11.8
- Return on equity (ROE): 2009 -77.0; 2013 -7.5
- Liquid assets to total assets: 2009 16.1; 2013 15.3; 2014 16.5
- Liquid assets to short-term liabilities: 2009 31.7; 2013 42.8; 2014 46.6

External accounts highlights
- Balance of goods and services (percent of GDP): 2012 21.6; 2013 21.7
- Exports (percent of GDP): 2012 178.7; 2013 171.4
- Imports (percent of GDP): 2012 157.1; 2013 149.7
- Gross international reserves (millions of U.S. dollars): 2012 308.6; 2013 539.3
- Euros per U.S. dollar (average): 2012 0.78; 2013 0.75; 2014 0.75
- Real exchange rate vis-à-vis Italy: 2012 98.0; 2013 100.0

Additional fiscal and banking facts
- Public funds used to recapitalize Cassa di Risparmio della Repubblica di San Marino (CRSM): totaling "13 percent of GDP (in three rounds of recapitalization)."
- Net public debt rose to "about 20 percent of GDP in 2015."
- Sovereign has not established access to international markets.
- NPLs as of end-2015: "€2 billion (47 percent of total loans or 140 percent of GDP)."
  - Of this stock, "€1.1 billion (57 percent of total) pertains to CRSM."
  - Excluding CRSM, remaining NPLs "€837 million" with about half related to nonresidents, mostly Italy.
- Banking system losses in 2015: net losses of "€35 million (€18 million excluding CSRM), or 2½ percent of GDP."
- CRSM capital shortfall: CRSM capital position at "7.5 percent—€46 million (3¼ percent of GDP) short of the minimum capital requirement."
- Excluding CRSM, system capital adequacy ratio "13.1 percent at end-September 2015."
- NPL coverage ratio declined to "29 percent."
- Liquid assets cover "almost 60 percent of short-term liabilities."
- Authorities estimate nonresident deposit outflows of about "€260 million until early 2016" from Italian voluntary disclosure policy.

### Financial sector — repairing balance sheets (findings and recommended steps)
Findings
- Systemic NPLs: "close to 46 percent of total gross loans (31 percent excluding CRSM) as of end-September 2015."
- Coverage and provisioning: Coverage ratio "29 percent"; provisioning has not fully kept pace.
- Capital gaps: CRSM capital at "7.5 percent" and shortfall of "€46 million (3¼ percent of GDP)." System excluding CRSM "13.1 percent" but may be overstated because provisions are low.
- Assets and deleveraging: Bank assets declined from "over 600 percent of GDP in 2008 to about 400 percent in 2015."
- Losses: Net losses "€35 million (€18 million excluding CSRM), or 2½ percent of GDP, in 2015."

Recommended strategy (explicit steps)
- Asset quality reviews (AQRs):
  - Conduct forward-looking AQRs for all banks to reduce uncertainty.
  - CBSM should consider hiring external parties to speed up AQRs given capacity constraints.
- Provisioning:
  - CBSM should require banks to quickly meet additional provisioning needs to bring NPL coverage ratios to adequate levels.
- Capitalization:
  - Banks whose capitalization falls below the regulatory minimum should present time-bound market-based recapitalization plans to CBSM.
  - Plans should include safeguards such as "no dividend payments."
  - Foreign investors could support recapitalization efforts, applying sound fit-and-proper standards.
- Resolution:
  - Banks with insolvent positions unlikely to be addressed within a reasonable period should be resolved.
  - For systemically important banks, the state could subscribe remaining capital shortfalls, while "carefully considering the case for diluting existing shareholders upfront."
- NPL workout mechanisms:
  - Encourage pooling through asset management companies (AMCs); three largest banks considering a joint AMC, likely comprising separate funds for each bank due to valuation disagreements.
  - Note: "Any capital release should be avoided, since banks retain full ownership of the funds."

### Fiscal policy and structural recommendations (key policy recommendations)
- Fiscal consolidation target: "Pursue gradual consolidation of one percent of GDP over four years to rebuild buffers."
- Focus adjustment on:
  - "Containing the public sector wage bill"
  - "Pension, and health benefits"
- Tax and revenue reforms:
  - "Introduce a VAT system with a revenue-increasing rate."
- Budget priorities:
  - "Create fiscal space for capital investment."
  - "Establish the sovereign’s access to external financing."
- Structural policy:
  - "Improve the business environment, including debt enforcement and insolvency mechanisms, to facilitate the reallocation of resources to nonbank sectors."
  - "Continue the current focus on international cooperation."
- Financial sector policy (recap):
  - "Speed up the unfinished restructuring of the largest bank."
  - "Conduct an in-depth asset-quality assessment of the rest of the banking system followed by appropriate contingency plans."
  - "Remove legal, regulatory and tax obstacles to facilitate dealing with problem loans."

### Traction of past Fund advice and implementation status
- Authorities undertook measures to achieve fiscal consolidation.
- Designing a strategy to address NPLs in line with staff recommendations.
- In process of recapitalizing the largest bank (CRSM) but have not implemented staff advice to "speed up its restructuring and improve its governance (IMF Country Report 15/94)."

### Box 1 — San Marino’s Banking System: An Overview (selected facts)
- Consolidation and structure:
  - Number of operational credit institutions declined from 12 to 7 between 2009 and 2015.
  - Number of operative fiduciary companies dropped from 48 to 8 between 2009 and 2015.
  - One of the 7 operational credit institutions de facto operates as a “bad bank” for another credit institution.
  - The two largest banks, CRSM and Banca di San Marino, account for 56 percent of total assets and deposits of the system.
  - On average about 52 percent of the loans are vis-à-vis nonresidents; only 25 percent of deposits is from nonresidents.
- Size and structure:
  - Banking sector assets to GDP comparable to Cyprus and Ireland.
  - All banks are domestically owned.
  - Average capital-adequacy ratio at around 11 percent.
- Real estate and NPLs:
  - Significant share of NPLs is related to mortgage loans.
  - Stagnant real estate market and restrictions to nonresident ownership impede recovery and recovery of foreclosed properties.
  - Recommendation: explore gradual opening of the real estate market to nonresident investors.
- Legal, regulatory, and tax suggestions:
  - Insolvency regime mainly for liquidations; limited tools for debt restructuring.
  - Voluntary code for multi-creditor coordination lacks binding mechanisms for minority dissenting creditors.
  - Closed-fund AMC use complicated by regulatory requirements; tax deductibility limit of 5 percent of total loans per annum should be reconsidered.
- Cross-border NPLs:
  - Many NPLs have cross-border elements, mostly Italy; need to improve bilateral judicial cooperation with Italy.
- Provisioning, supervision, macroprudential:
  - CBSM should introduce more stringent provisioning requirements and stricter on-site supervision.
  - Credit registry start later this year will improve credit risk assessment.
  - Macroprudential tools (loan-to-value, debt-to-income limits) could help mitigate systemic credit risk.
- CRSM specific:
  - CRSM assets declined to €1.7 billion, or 121 percent of GDP by end 2015 (from 213 percent of GDP in 2009), including Delta portfolio of about €700 million.
  - CRSM undercapitalized and loss-making.
  - January 2016 revised business plan estimated capital gap of €54 million, €40 million funded by a tier-2 hybrid bond subscribed by the state.
  - State will issue a €40 million bond underwritten by CRSM and other banks; bonds offered to the public with placement guaranteed by banks if under-subscribed.
  - Merging a state-controlled real estate company and the foundation into CRSM and revaluation expected to close remaining €14 million gap and provide additional €10 million capital.

### Box 2 — Past CRSM Recapitalizations (selected facts and recommendations)
- CRSM systemic importance:
  - Accounts for 30 percent of system total assets (121 percent of GDP), 38 percent of total loans, and 30 percent of customer deposits.
  - Since 2014 recapitalization, the state owns 46 percent of shares and majority voting rights.
- Recapitalization history (2012–2014):
  - Late 2012: government extended low interest loan for €60 million; shareholders injected €60 million plus €20 million own funds.
  - Early 2013: subordinated debt issued for €40 million, €35 million underwritten by social security fund.
  - 2014: state injected €85 million in exchange for 46 percent stake; government bond fully subscribed by CRSM financed injection.
  - Aggregate public support totaled 13 percent of GDP.
- Assessment and recommendations:
  - 2014 modalities fall short of best practice; nonstate shareholders were not diluted upfront.
  - Make recapitalization contingent on solid reorganization plan; plan should show profitability under conservative downside scenario and include contingency plans.
  - State should appoint experienced turnaround experts to board and management.
  - Carefully consider shareholder dilution consistent with best practice.
  - Consider external financing to break bank-sovereign feedback loop.
  - Close coordination among CBSM, government, banks, judiciary; consider time-bound working group.
  - CBSM needs additional resources and full independence in deployment; capacity to implement AQRs, transpose EU directives, finalize credit register.
- Authorities’ views:
  - Concur banks’ balance sheets need repair; acknowledge capacity constraints.
  - Central bank working on comprehensive NPL strategy; authorities requested IMF technical assistance and started renegotiating CRSM ownership with foundation.

### Recent economic developments and selected indicators (2006–15 and 2012–16 exact values)
Selected economic and social indicators, 2012–16 (exact values preserved)
- GDP per capita (2014): 44,216 U.S. dollars
- Life expectancy at birth (2010): 83.2 years
- Population (December 2013): 31,448 persons
- Literacy, adult (2008): 96 percent

Activity and Prices (percent change or levels by year)
- Real GDP (percent change): 2012:-7.5 2013:-3.0 2014:-1.0 2015:1.0 2016:1.1
- Domestic demand: 2012:-4.6 2013:-1.4 2014:-3.6
- Final consumption: 2012:0.0 2013:0.1 2014:-2.0
- Fixed investment: 2012:-13.0 2013:-7.0 2014:-17.2
- Net exports: 2012:-4.1 2013:-2.3 2014:2.1
- Exports: 2012:-9.8 2013:-6.6 2014:-1.0
- Imports: 2012:-8.9 2013:-6.1 2014:-2.5
- Employment (percent change): 2012:-2.4 2013:-1.4 2014:-1.6
- Unemployment rate (average; percent): 2012:6.9 2013:8.1
- Inflation rate (average; percent): 2012:2.8 2013:1.3 2014:1.1 2015:0.4 2016:0.9
- Nominal GDP (millions of euros): 2012:1401.5 2013:1404.7 2014:1390.5 2015:1410.9 2016:1438.8

Public Finances (percent of GDP) 1/
- Revenues: 2012:20.4 2013:19.6 2014:22.5 2015:21.8 2016:22.0
- Expenditure: 2012:23.0 2013:21.1 2014:21.7 2015:21.8 2016:22.6
- Overall balance: 2012:-2.6 2013:-1.5 2014:0.8 2015:0.1 2016:-0.6
- Government debt: 2012:15.4 2013:20.8 2014:19.0 2015:18.8 2016:21.8
- Government deposits (millions of euros): 2012:72.9 2013:55.9 2014:40.4 2015:32.9 2016:32.9

Money and Credit
- Deposits (percent change): 2012:-1.6 2013:-2.0 2014:1.9
- Private sector credit (percent change): 2012:11.2 2013:-9.6 2014:1.0
- Net foreign assets (percent of GDP): 2012:-26.7 2013:4.4 2014:-4.0

External Accounts (percent of GDP)
- Balance of goods and services: 2012:21.6 2013:21.7 2014:25.9
- Exports: 2012:178.7 2013:171.4 2014:171.4
- Imports: 2012:157.1 2013:149.7 2014:145.4
- Gross international reserves (millions of U.S. dollars): 2012:385.0 2013:539.3 2014:392.0

Financial Soundness Indicators (percent) 2/ (selected)
- Regulatory capital to risk-weighted assets: 2012:8.8 2013:13.6 2014:11.4 2015:11.0
- Bad loans to total loans: 2012:9.6 2013:13.9 2014:16.1 2015:18.4
- Loan loss provision to total loans: 2012:42.5 2013:26.7 2014:30.3 2015:29.4
- Return on equity (ROE): 2012:-22.5 2013:-7.8 2014:-21.4 2015:-11.5
- Liquid assets to total assets: 2012:28.0 2013:29.6 2014:32.4 2015:31.0
- Liquid assets to short-term liabilities: 2012:58.7 2013:60.6 2014:55.4 2015:57.2

Projection (medium term, select series)
- Real GDP (percent change): 2016:1.1 2017:1.2 2018:1.3 2019:1.3 2020:1.3 2021:1.3
- Exports: 2016:1.7 2017:1.9 2018:2.1 2019:2.3 2020:2.2 2021:2.3
- Imports: 2016:-1.4 2017:-1.6 2018:-1.8 2019:-1.9 2020:-1.9 2021:-1.9
- Revenues (percent of GDP): 2016:22.5 2017:21.8 2018:22.0 2019:21.8 2020:21.3 2021:21.3
- Expenditure (percent of GDP): 2016:21.7 2017:21.8 2018:22.6 2019:22.1 2020:21.8 2021:21.8
- Overall balance (percent of GDP): 2016:-0.6 2017:-0.3 2018:-0.4 2019:-0.4 2020:-0.4 2021:-0.4
- Government debt (percent of GDP): 2016:21.8 2017:21.6 2018:21.5 2019:21.5 2020:21.4

### Risk Assessment Matrix — principal risks, likelihood, impacts, and policy responses
- Structurally weak growth in Italy and the euro area
  - Risk relative likelihood: High
  - Impact if realized: High
  - Policy response:
    - Let automatic stabilizers work.
    - Postpone fiscal adjustment; reevaluate periodically.
- Further modest public bank recapitalizations
  - Risk relative likelihood: High
  - Impact if realized: Medium
  - Policy response:
    - Accelerate establishing access to external financing for the sovereign.
    - Accelerate AQRs.
    - Prepare adjustment/contingency plans, based on AQR results.
- Failure to clean up bank balance sheets, leading to a loss of confidence in the system
  - Risk relative likelihood: Medium
  - Impact if realized: High
  - Policy response:
    - Address balance sheet weaknesses to avoid large public recapitalization needs.
- Higher medium-term growth from inclusion in Italy’s tax whitelist
  - Risk relative likelihood: Medium
  - Impact if realized: Medium
  - Policy response:
    - Stick to reform plans despite upside.
- Loss of cross-border or domestic electronic payment services
  - Risk relative likelihood: Low
  - Impact if realized: Medium
  - Policy response:
    - Authorities are setting up a domestic electronic payment services provider.
- Tensions with neighboring Italy resurface
  - Risk relative likelihood: Low
  - Impact if realized: High
  - Policy response:
    - Enhance focus on international relations.
    - Start the credit register on schedule.
    - Continue to work towards early adoption of OECD initiative for exchange of tax information.

### Appendix II — Public Debt Sustainability (key projections and scenarios)
Debt trajectory and projections
- Gross central government debt is projected to stabilize below 22 percent of GDP.
- Before the crisis, gross debt stood below 15 percent of GDP; net debt was negative as the government held cash buffers in excess of 15 percent of GDP.
- Financial support to CRSM amounting to 13 percent of GDP (11 percent provided by the central government and 2 percent by the Social Security Institute) increased gross debt to more than 20 percent of GDP by 2013, while cash buffers decreased to below 4 percent of GDP.
- In 2014, gross public debt temporarily dropped to 19 percent of GDP due to fiscal over-performance.
- The fiscal balance is expected to deteriorate modestly in 2015–2016 and over the medium term, including due to higher capital expenditure.
- The government is in the process of issuing a €40 million bond to recapitalize CRSM.
- Public debt is projected to stabilize at 21–22 percent of GDP.

Main risks and contingent liabilities
- Main risk: possible need for further bank capital support.
- Contingent liability shock scenario: further recapitalization needs amounting to 20 percent of GDP would, without a change in the fiscal stance, increase public debt to 42 percent of GDP by 2020.
- Such dynamics may not be sustainable given lack of track record in sovereign bond issuance and untested access to external financing.

Fiscal adjustment scenarios and staff recommendations
- Staff’s suggested adjustment of 1 percent of GDP (compared to 2016 projections excluding additional capital expenditure) over four years would:
  - Put public debt on a clear downward trend and provide fiscal space for contingent liabilities.
  - Under these adjustments, debt would peak below 42 percent of GDP and decrease to 36 percent of GDP by 2020, even with the contingent shock.
- Baseline projection: public debt stabilizing at 21–22 percent of GDP absent further shocks.
- Contingent-liability shock (20 percent of GDP) without adjustment: public debt reaching 42 percent of GDP by 2020.
- Contingent-liability shock plus recommended fiscal adjustment (1 percent of GDP over four years): debt peaks below 42 percent and falls to 36 percent of GDP by 2020.

Key fiscal and policy facts cited
- CRSM support: 13 percent of GDP total (11 percent central government; 2 percent Social Security Institute).
- Planned recapitalization bond: €40 million.
- Projected stabilization band for public debt: 21–22 percent of GDP.
- Contingent recapitalization shock modeled at: 20 percent of GDP.
- Staff adjustment recommended: 1 percent of GDP over four years.
- Projected debt under shock without adjustment: 42 percent of GDP by 2020.
- Projected debt under shock with adjustment: decrease to 36 percent of GDP by 2020.

### VAT introduction and tax policy
- VAT regime:
  - The new regime should enter into force in 2017.
  - Reform expected to be initially neutral with respect to tax revenues, while improving tax system efficiency and, over time, enhancing tax compliance.
  - VAT rates not finalized; most likely two or three different rates with the highest rate expected to be lower than the Italian equivalent.
- Note: "Does not reflect the introduction of the VAT, planned for 2017." (table footnote)

### Financial sector: resilience, legacy issues, and supervisory reform
- Banking sector capitalization, with the exception of CRSM, is in line with supervisory regulatory requirements.
- Liquidity situation, despite pressures from the Italian Voluntary Disclosure program, does not reveal systemic risks at this time.
- Legacy: NPLs remain high.
- Authorities support individual Asset Quality Reviews on the largest banks, likely during planned on-site inspections.
- The fourth CRSM regulatory capital intervention underscores urgency to strengthen CRSM and restore profitability.
- Authorities working to minimize future state commitment in CRSM and aim to dismiss state participation once restructured.
- Central Bank:
  - Newly appointed senior management working to enhance supervisory and regulatory capacity in line with international best practice.
  - CBSM needs additional resources and funds to fully fulfill tasks.
  - Authorities value in-depth technical discussions with Fund staff on resolution framework and Basel III implementation.

### AML/CFT and tax transparency
- MONEYVAL and EU Commission acknowledged progress toward FATF requirements and EU AML/CFT Directives.
- National risk assessment program underway.
- Continued work on implementation of OECD automatic exchange of tax information.
- Exchange of tax information starting in 2017.

### Structural reforms, labor market, and business environment
- Authorities pursuing a modern, wide-ranging business model to improve market sentiment, transparency, and development.
- Measures include spending review, tax reform, anti-money laundering progress, scientific and cultural initiatives.
- E-commerce law increased enterprises in product scouting and basic e-commerce services.
- High-tech business incubator expanded connections with researchers and universities.
- Vocational and training programs and ad hoc rules to ease recruitment of specialized workers continue.
- Authorities continue to consider opening real estate market to foreign investments with safeguards.
- Priority: continue negotiations for an Association Agreement with the EU and finalize Memorandum of Understanding between CBSM and Bank of Italy.
- Credit register implementation underway; prospects for exchange of credit information with Italy described as very positive.

### Statistics, capacity constraints, and authorities’ stance
- Authorities stress severe capacity constraints in human and financial resources.
- Some recommended measures require careful assessment of macroeconomic impact and broad ownership.
- Authorities committed to strengthening statistical information with IMF cooperation and pooling Central Bank and Ministry resources.

### Implementation and commitments
- Authorities reaffirm commitment to implement a reform agenda promoting an internationally transparent, open, flexible and competitive Sammarinese economy.
- Activation of the credit register should start as scheduled, enhancing cooperation with the Bank of Italy.
- Staff welcomes imminent completion of the AML-CFT national risk assessment.

*Source: IMF staff report for the 2016 Article IV consultation (April 21, 2016).*

### introduction of a VAT system. In addition, efforts to contain the public sector wage bill and

### _cr16111 - introduction of a VAT system. In addition, efforts to contain the public sector wage bill and 

### Context, outlook, and risks
- Economy: "bottoming out after six years of recession"; loss of "a third of San Marino’s output."
- Recovery: Modest recovery of "about 1 percent in 2015"; projected "Modest growth of 1–1¼ percent" for 2016 and the medium-term.
- Banking impact: Nonperforming loans increased to "close to 46 percent of loans."
- Financial sector headwinds: Bank assets declined from "over 600 percent of GDP in 2008 to about 400 percent in 2015."
- External risks: "Prolonged slow growth in Italy" and the euro area are downside risks; inclusion in Italy’s whitelist is an upside.
- Structural constraints: Very small size, capacity constraints, skills shortages, gaps in macroeconomic statistics (no balance of payments data; national accounts published with a one-year lag), not a member of the EU or the Eurosystem (no lender-of-last-resort).
- Authorities’ view: Agree on slow return to growth; emphasize short-term costs of complying with international best practice; committed to increasing economic flexibility and diversification; noted capacity bottlenecks in state administration and CBSM.

### Key macroeconomic and social indicators (selected exact figures)
- GDP per capita (2013): 56,112 U.S. dollars
- Life expectancy at birth (2010): 83.2 years
- Population (December 2013): 31,460 persons
- Literacy, adult (2008): 96 percent

Projection table highlights (2012–16)
- Real GDP (percent change): 2012 -7.5; 2013 -4.5; 2014 -1.0; 2015 1.0; 2016 1.1
- Employment (percent change): 2012 -2.6; 2013 -1.3; 2014 -0.8
- Unemployment rate (average; percent): 2012 6.9; 2013 8.1; 2014 8.7
- Inflation rate (average; percent): 2012 2.8; 2013 1.3; 2014 1.1; 2015 0.4; 2016 0.9
- Nominal GDP (millions of euros): 2012 1401.5; 2013 1357.1; 2014 1343.5; 2015 1363.3; 2016 1392.1

Public finances (percent of GDP, central government)
- Revenues: 2012 20.4; 2013 20.3; 2014 22.1; 2015 21.5; 2016 21.5
- Expenditure: 2012 23.0; 2013 21.8; 2014 23.2; 2015 22.7; 2016 22.8
- Overall balance: 2012 -2.7; 2013 -1.5; 2014 -1.1; 2015 -1.1; 2016 -1.2
- Government debt: 2012 15.4; 2013 21.6; 2014 22.9; 2015 23.7; 2016 24.4
  - Loans: 2012 7.1; 2013 14.3; 2014 14.9; 2015 15.8; 2016 16.7
  - Net account payables: 2012 8.3; 2013 7.3; 2014 8.0; 2015 7.9; 2016 7.8
- Government deposits (millions of euros): 2012 72.9; 2013 55.9; 2014 40.4; 2015 45.0; 2016 45.0

Financial soundness indicators (latest available / 2014)
- Regulatory capital to risk-weighted assets: 2009 8.8; 2013 13.6; 2014 13.0
- Bad loans to total loans: 2009 9.6; 2013 13.9; 2014 15.3
- Loan loss provision to total loans (based on total loan loss provision): 2009 13.3; 2013 11.5; 2014 11.8
- Return on equity (ROE): 2009 -77.0; 2013 -7.5
- Liquid assets to total assets: 2009 16.1; 2013 15.3; 2014 16.5
- Liquid assets to short-term liabilities: 2009 31.7; 2013 42.8; 2014 46.6

External accounts highlights
- Balance of goods and services (percent of GDP): 2012 21.6; 2013 21.7
- Exports (percent of GDP): 2012 178.7; 2013 171.4
- Imports (percent of GDP): 2012 157.1; 2013 149.7
- Gross international reserves (millions of U.S. dollars): 2012 308.6; 2013 539.3
- Euros per U.S. dollar (average): 2012 0.78; 2013 0.75; 2014 0.75
- Real exchange rate vis-à-vis Italy: 2012 98.0; 2013 100.0

Additional fiscal and banking facts
- Public funds used to recapitalize Cassa di Risparmio della Repubblica di San Marino (CRSM): totaling "13 percent of GDP (in three rounds of recapitalization)."
- Net public debt rose to "about 20 percent of GDP in 2015."
- Sovereign has not established access to international markets.
- NPLs as of end-2015: "€2 billion (47 percent of total loans or 140 percent of GDP)."
  - Of this stock, "€1.1 billion (57 percent of total) pertains to CRSM."
  - Excluding CRSM, remaining NPLs "€837 million" with about half related to nonresidents, mostly Italy.
- Banking system losses in 2015: net losses of "€35 million (€18 million excluding CSRM), or 2½ percent of GDP."
- CRSM capital shortfall: CRSM capital position at "7.5 percent—€46 million (3¼ percent of GDP) short of the minimum capital requirement."
- Excluding CRSM, system capital adequacy ratio "13.1 percent at end-September 2015."
- NPL coverage ratio declined to "29 percent."
- Liquid assets cover "almost 60 percent of short-term liabilities."
- Authorities estimate nonresident deposit outflows of about "€260 million until early 2016" from Italian voluntary disclosure policy.

### Financial sector—repairing balance sheets (findings and recommended steps)
Findings
- Systemic NPLs: "close to 46 percent of total gross loans (31 percent excluding CRSM) as of end-September 2015."
- Coverage and provisioning: Coverage ratio "29 percent"; provisioning has not fully kept pace.
- Capital gaps: CRSM capital at "7.5 percent" and shortfall of "€46 million (3¼ percent of GDP)." System excluding CRSM "13.1 percent" but may be overstated because provisions are low.
- Assets and deleveraging: Bank assets declined from "over 600 percent of GDP in 2008 to about 400 percent in 2015."
- Losses: Net losses "€35 million (€18 million excluding CSRM), or 2½ percent of GDP, in 2015."

Recommended strategy (explicit steps)
- Asset quality reviews (AQRs):
  - Conduct forward-looking AQRs for all banks to reduce uncertainty.
  - CBSM should consider hiring external parties to speed up AQRs given capacity constraints.
- Provisioning:
  - CBSM should require banks to quickly meet additional provisioning needs to bring NPL coverage ratios to adequate levels.
- Capitalization:
  - Banks whose capitalization falls below the regulatory minimum should present time-bound market-based recapitalization plans to CBSM.
  - Plans should include safeguards such as "no dividend payments."
  - Foreign investors could support recapitalization efforts, applying sound fit-and-proper standards.
- Resolution:
  - Banks with insolvent positions unlikely to be addressed within a reasonable period should be resolved.
  - For systemically important banks, the state could subscribe remaining capital shortfalls, while "carefully considering the case for diluting existing shareholders upfront."
- NPL workout mechanisms:
  - Encourage pooling through asset management companies (AMCs); three largest banks considering a joint AMC, likely comprising separate funds for each bank due to valuation disagreements.
  - Note: "Any capital release should be avoided, since banks retain full ownership of the funds."

### Fiscal policy and structural recommendations (key policy recommendations)
- Fiscal consolidation target: "Pursue gradual consolidation of one percent of GDP over four years to rebuild buffers."
- Focus adjustment on:
  - "Containing the public sector wage bill"
  - "Pension, and health benefits"
- Tax and revenue reforms:
  - "Introduce a VAT system with a revenue-increasing rate."
- Budget priorities:
  - "Create fiscal space for capital investment."
  - "Establish the sovereign’s access to external financing."
- Structural policy:
  - "Improve the business environment, including debt enforcement and insolvency mechanisms, to facilitate the reallocation of resources to nonbank sectors."
  - "Continue the current focus on international cooperation."
- Financial sector policy (recap):
  - "Speed up the unfinished restructuring of the largest bank."
  - "Conduct an in-depth asset-quality assessment of the rest of the banking system followed by appropriate contingency plans."
  - "Remove legal, regulatory and tax obstacles to facilitate dealing with problem loans."

### Traction of past Fund advice and implementation status
- Authorities undertook measures to achieve fiscal consolidation.
- Designing a strategy to address NPLs in line with staff recommendations.
- In process of recapitalizing the largest bank (CRSM) but have not implemented staff advice to "speed up its restructuring and improve its governance (IMF Country Report 15/94)."

*Source: IMF staff report for the 2016 Article IV consultation (April 21, 2016).*

### Box 1. San Marino’s Banking System: An Overview

### Box 1. San Marino’s Banking System: An Overview

### Consolidation and structure
- Since the outbreak of the global crisis, San Marino’s banking sector has consolidated substantially.
- Between 2009 and 2015:
  - Number of operational credit institutions declined from 12 to 7.
  - Number of operative fiduciary companies dropped from 48 to 8.
  - One of the 7 operational credit institutions de facto operates as a “bad bank” for another credit institution.
- The two largest banks, CRSM and Banca di San Marino, account for 56 percent of total assets and deposits of the system.
- On average:
  - About 52 percent of the loans are vis-à-vis nonresidents.
  - Only 25 percent of deposits is from nonresidents.

### Size relative to peers and structural features
- The size of San Marino’s banking sector, measured as asset to GDP, is comparable to Cyprus and Ireland.
- All banks are domestically owned.
- Lack of foreign-owned subsidiaries or branches prevents Sammarinese banks from having even indirect access to sources of emergency liquidity assistance.
- Average capital-adequacy ratio at around 11 percent.
- The Sammarinese banking system compares unfavorably with peer countries given high nonperforming loans and relatively low loan-loss provisions.

### Real estate market and NPLs
- In the domestic market, a significant share of NPLs is related to mortgage loans.
- An important factor impeding timely and effective recovery is the stagnant Sammarinese property market, which has limited capacity to absorb a large number of foreclosed properties.
- Existing restrictions to nonresident ownership constrain market absorption.
- Recommendation: Authorities should explore the scope for a gradual opening of the Sammarinese real estate market to nonresident investors, in line with San Marino’s longer-term goal to integrate into the EU. This would support asset prices and hence facilitate NPL resolution.

### Legal, regulatory, and tax reforms for problem loans
- The insolvency regime is almost exclusively used for asset liquidations and does not provide effective tools for debt restructuring, limiting preservation of viable businesses.
- Sammarinese banks have adopted a voluntary code of conduct guiding multi-creditor coordination during debt restructuring; this process lacks mechanisms to make restructuring terms binding for minority dissenting creditors.
- The use of closed-fund AMCs by banks is complicated by a number of regulatory requirements; comprehensive addressing of these issues will require further legal and regulatory changes.
- To encourage provisioning and write-offs, the current limit on tax deductibility of 5 percent of total loans per annum should be reconsidered.

### Cross-border elements of NPLs
- Many NPLs have a cross-border element (e.g., borrower is nonresident and/or collateral located outside San Marino, mostly in Italy).
- Cross-border aspects give rise to legal obstacles that complicate management and resolution of problem loans, resulting in delays and high costs.
- Improving the framework for bilateral judicial cooperation between San Marino and Italy could help address these issues.

### Provisioning standards, supervision, and macroprudential measures
- Recommendation: The CBSM should gradually introduce more stringent provisioning requirements and employ stricter on-site supervision to reduce the likelihood of recurring NPL provisioning problems.
- The start of the credit registry later this year will help improve banks’ credit risk assessment.
- Macroprudential measures, such as limits to loan-to-value and debt-to-income ratios, could help mitigate the buildup of systemic credit risk in the banking sector.

### Cassa di Risparmio di San Marino (CRSM)
- CRSM underwent three separate recapitalizations over the period 2012–14; the fourth recapitalization in four years is underway.
- CRSM assets declined to €1.7 billion, or 121 percent of GDP by end 2015 (from 213 percent of GDP in 2009), including its Delta portfolio of Italian loans of about €700 million.
- CRSM remains undercapitalized, likely under-provisioned, and loss-making.
- In January 2016, at the request of the CBSM, CRSM submitted a revised business plan based on an estimated capital gap of €54 million, €40 million of which would be funded by a tier-2 hybrid bond subscribed by the state.
- The state will issue a €40 million bond, underwritten by CRSM and the other Sammarinese banks; these bonds will be offered to the public, with placement guaranteed by the banks in case the offer goes under-subscribed.
- Merging a real estate company controlled by the state and the foundation (CRSM’s major nonstate shareholder) into CRSM and the subsequent revaluation of CRSM’s entire real estate portfolio is expected to:
  - Close the remaining €14 million capital gap.
  - Provide an additional €10 million capital to absorb projected 2016–17 losses.

*Source: IMF staff compilation from Box 1, "San Marino’s Banking System: An Overview."*

### Box 2. Past CRSM Recapitalizations

### Box 2. Past CRSM Recapitalizations

### Background and systemic importance
- CRSM is San Marino’s oldest and largest bank.
- It accounts for 30 percent of the system’s total assets (121 percent of GDP), 38 percent of total loans, and 30 percent of customer deposits.
- CRSM is a domestic bank, majority owned by a foundation established by law in San Marino for charitable purposes.
- Since the 2014 recapitalization, the state owns 46 percent of shares, as well as the majority of voting rights.
- The foundation consists of some 160 individuals, who together propose and elect new foundation members. The foundation’s resources are entirely financed by dividends received from CRSM in the past.

### Recapitalization history (2012–2014)
- Recapitalizations were required after the liquidation of Delta Group, CRSM’s large Italian subsidiary, by the Bank of Italy due to alleged fraud in 2009, which severely damaged CRSM’s capitalization.
- Late 2012 recapitalization:
  - The government extended a low interest loan to CRSM’s shareholders for €60 million.
  - Shareholders injected the €60 million loan into the bank’s capital together with €20 million of their own funds.
  - With this, the foundation retained its equity stake.
  - In exchange, the government obtained concessions, such as the possibility to name the chairman of the bank’s board and two other board members.
- Early 2013 recapitalization:
  - The bank issued subordinated debt for €40 million, €35 million of which was underwritten by the social security fund.
  - Public support was granted with no dilution of the foundation’s stake and limited or no conditionality.
- 2014 recapitalization:
  - The state injected €85 million in capital in exchange for a 46 percent minority equity stake, and the right to appoint a majority of the bank’s board members, in addition to the board’s chairperson.
  - A government bond fully subscribed by CRSM financed the capital injection.
- Aggregate public support over these operations totaled 13 percent of GDP.
- Despite repeated public support, the foundation was able to preserve a majority stake as well as veto power over any sale of the state’s shares in the bank.

### Assessment of modalities and risks
- The modalities of the 2014 operation fall short of international best practice:
  - The recapitalization did not include upfront dilution of existing nonstate shareholders, who, according to best practice, should be the first in line to finance losses.
  - While offering the state bond to the public is a step in the right direction, authorities could have considered external financing to fully break the bank-sovereign feedback loop.
- Continued reliance on public support without stronger conditionality or shareholder dilution raises the risk of future fiscal exposure.

### Policy recommendations and conditionality for current recapitalization
- Make recapitalization contingent on a solid reorganization plan that brings the bank back to profitability:
  - The bank’s revised business plan was judged to rely on overly optimistic assumptions even in the envisaged adverse scenario.
  - The plan should illustrate how the bank would regain profitability under a relatively conservative downside scenario, likely requiring a more aggressive downsizing.
  - Contingency plans need to be formulated in case the restructuring process is unsuccessful.
- Governance and management changes:
  - The state as the main shareholder should appoint experienced turnaround experts to CRSM’s board and executive management positions.
- Careful consideration of shareholder dilution:
  - Any injection of public resources should carefully consider the dilution of nonstate shareholders, consistent with best practice that nonstate shareholders bear losses first.
- Consider external financing to break the bank-sovereign link:
  - External financing options could be used to fully break the bank-sovereign feedback loop.

### Coordination, capacity, and accompanying measures
- Addressing financial sector challenges requires close coordination among stakeholders and additional resources:
  - Developing a strategy to clean-up banks’ balance sheets and streamlining laws, regulation, and taxation calls for close coordination between the CBSM, the government, the banks, and the judiciary.
  - Establishment of a time-bound working group could be considered.
  - The CBSM requires additional resources, and full independence in their deployment.
  - CBSM needs sufficient capacity to bolster bank supervision (including the AQRs), transpose EU directives (including the Capital Requirements Regulations and Directive and the Bank Recovery and Resolution Directive, as required by the monetary agreement with the EU), and finalize the credit register.

### Authorities’ views (as reported)
- Authorities concur that banks’ balance sheets need repair and acknowledged capacity constraints that have limited the speed of AQRs.
- The central bank is working on a comprehensive strategy to address the NPL problem; authorities acknowledged the need for close coordination.
- On tax treatment of provisions and write-offs, authorities noted that scrapping the limit on tax deductibility might have substantial fiscal consequences because the limit also applies to nonfinancial companies; they favored a temporary exemption narrowly targeted at banks’ existing NPL portfolios.
- On CRSM specifically:
  - Authorities view bringing CRSM back to profitability as a crucial challenge.
  - They pointed out CRSM’s Delta portfolio consists of restructured loans, for which credit risk should now be low, and that excluding Delta assets CRSM’s financial position would be broadly in line with the rest of the Sammarinese banking system.
  - Authorities have requested IMF technical assistance to inform restructuring strategy and have started renegotiating CRSM’s ownership structure with the foundation to better reflect past and current state support.

*Source: Box 2. Past CRSM Recapitalizations (extracted from the provided IMF content).*

### conclusion of the bilateral economic cooperation agreement with Italy are important achievements.

### _cr16111 - conclusion of the bilateral economic cooperation agreement with Italy are important achievements.

### Key achievements and reforms
- Conclusion of the bilateral economic cooperation agreement with Italy are important achievements.
- The activation of the credit register should start as scheduled, enhancing cooperation with the Bank of Italy and helping banks upgrade their credit risk assessment.
- Staff welcomes the imminent completion of the AML-CFT national risk assessment.
- Exchange of tax information starting in 2017.

### Article IV consultation timing
- It is recommended that the next Article IV consultations with the Republic of San Marino be held on the standard 12-month cycle.

### Recent economic developments (select indicators and trends, 2006–15)
- Real GDP Growth: charted for San Marino and Italy (2006–2015) with a noted "Projection" series.
- Employment (January 2007=100): Index series shown for Industry and Total.
- Unemployment rate (right scale): series shown.
- Construction (Number of new developments and extensions): series shown.
- Inflation (Percent; year-on-year): series shown.

### Financial sector indicators (2008–15) — selected figures
- Banking System Assets (Billions of euros): breakdown includes Foreign assets; Loans to non-bank financial institutions; Loans to households and other resident sectors; Other assets.
- Banking System Funding (Billions of euros): Resident deposits; Non-resident deposits; Repurchase agreements; Debt securities; Other.
- Bank Liquidity 1/: Coverage Ratio on due to customer at 7 days (percent, right scale); Liquidity available up to 7 days (billions of euros).
- Monetary Authorities' Net Foreign Assets: Net foreign assets (in billions of euro); NFA in months of current year imports (rhs).
- Nonperforming Loans (euro millions): Provisions; NPLs net of provisions; Gross NPLs (percent of total loans, rhs).
- Banking System Loss (euro million): time series 2010–2015.

### Selected economic and social indicators, 2012–16 (exact values preserved)
- GDP per capita (2014): 44,216 U.S. dollars
- Life expectancy at birth (2010): 83.2 years
- Population (December 2013): 31,448 persons
- Literacy, adult (2008): 96 percent

Activity and Prices (percent change or levels by year)
- Real GDP (percent change): 2012:-7.5 2013:-3.0 2014:-1.0 2015:1.0 2016:1.1
- Domestic demand: 2012:-4.6 2013:-1.4 2014:-3.6
- Final consumption: 2012:0.0 2013:0.1 2014:-2.0
- Fixed investment: 2012:-13.0 2013:-7.0 2014:-17.2
- Net exports: 2012:-4.1 2013:-2.3 2014:2.1
- Exports: 2012:-9.8 2013:-6.6 2014:-1.0
- Imports: 2012:-8.9 2013:-6.1 2014:-2.5
- Employment (percent change): 2012:-2.4 2013:-1.4 2014:-1.6
- Unemployment rate (average; percent): 2012:6.9 2013:8.1
- Inflation rate (average; percent): 2012:2.8 2013:1.3 2014:1.1 2015:0.4 2016:0.9
- Nominal GDP (millions of euros): 2012:1401.5 2013:1404.7 2014:1390.5 2015:1410.9 2016:1438.8

Public Finances (percent of GDP) 1/
- Revenues: 2012:20.4 2013:19.6 2014:22.5 2015:21.8 2016:22.0
- Expenditure: 2012:23.0 2013:21.1 2014:21.7 2015:21.8 2016:22.6
- Overall balance: 2012:-2.6 2013:-1.5 2014:0.8 2015:0.1 2016:-0.6
- Government debt: 2012:15.4 2013:20.8 2014:19.0 2015:18.8 2016:21.8
- Government deposits (millions of euros): 2012:72.9 2013:55.9 2014:40.4 2015:32.9 2016:32.9

Money and Credit
- Deposits (percent change): 2012:-1.6 2013:-2.0 2014:1.9
- Private sector credit (percent change): 2012:11.2 2013:-9.6 2014:1.0
- Net foreign assets (percent of GDP): 2012:-26.7 2013:4.4 2014:-4.0
- Commercial banks: 2012:-46.3 2013:-22.2 2014:-25.9
- Central bank: 2012:19.5 2013:26.6 2014:21.9

External Accounts (percent of GDP)
- Balance of goods and services: 2012:21.6 2013:21.7 2014:25.9
- Exports: 2012:178.7 2013:171.4 2014:171.4
- Imports: 2012:157.1 2013:149.7 2014:145.4
- Gross international reserves (millions of U.S. dollars): 2012:385.0 2013:539.3 2014:392.0

Exchange Rate (average)
- Euros per U.S. dollar: 2012:0.78 2013:0.75 2014:0.75
- Real exchange rate vis-à-vis Italy: 2012:98.0 2013:100.0

Financial Soundness Indicators (percent) 2/ (selected)
- Regulatory capital to risk-weighted assets: 2012:8.8 2013:13.6 2014:11.4 2015:11.0
- Bad loans to total loans: 2012:9.6 2013:13.9 2014:16.1 2015:18.4
- Loan loss provision to total loans: 2012:42.5 2013:26.7 2014:30.3 2015:29.4
- Return on equity (ROE): 2012:-22.5 2013:-7.8 2014:-21.4 2015:-11.5
- Liquid assets to total assets: 2012:28.0 2013:29.6 2014:32.4 2015:31.0
- Liquid assets to short-term liabilities: 2012:58.7 2013:60.6 2014:55.4 2015:57.2

Projection (medium term, select series)
- Real GDP (percent change): 2016:1.1 2017:1.2 2018:1.3 2019:1.3 2020:1.3 2021:1.3
- Exports: 2016:1.7 2017:1.9 2018:2.1 2019:2.3 2020:2.2 2021:2.3
- Imports: 2016:-1.4 2017:-1.6 2018:-1.8 2019:-1.9 2020:-1.9 2021:-1.9
- Revenues (percent of GDP): 2016:22.5 2017:21.8 2018:22.0 2019:21.8 2020:21.3 2021:21.3
- Expenditure (percent of GDP): 2016:21.7 2017:21.8 2018:22.6 2019:22.1 2020:21.8 2021:21.8
- Overall balance (percent of GDP): 2016:-0.6 2017:-0.3 2018:-0.4 2019:-0.4 2020:-0.4 2021:-0.4
- Government debt (percent of GDP): 2016:21.8 2017:21.6 2018:21.5 2019:21.5 2020:21.4

### Central government statement of operations (2010–17) — fiscal composition highlights (percent of GDP)
- Revenue (2010–2017 shown): Revenue 2010:18.9 2011:18.3 2012:20.4 2013:19.6 2014:22.5 2015:21.8 2016:22.0 2017:21.8
- Taxes*: 2010:14.2 2011:13.0 2012:14.6 2013:14.6 2014:17.2 2015:17.0 2016:17.0 2017:17.4
  - Income Taxes: 2010:7.5 2011:7.1 2012:7.0 2013:7.4 2014:8.1 2015:8.1 2016:8.0 2017:8.2
  - Non-income taxes: 2010:6.7 2011:5.9 2012:7.6 2013:7.6 2014:9.1 2015:8.9 2016:9.0 2017:9.2
  - Taxes on international trade and transactions: 2010:4.0 2011:3.5 2012:4.5 2013:5.1 2014:6.4 2015:6.4 2016:6.4 2017:6.8
- Non-tax revenue: 2010:4.7 2011:5.2 2012:5.8 2013:5.0 2014:5.3 2015:4.9 2016:5.1 2017:4.3
- Expenditure: 2010:21.4 2011:22.4 2012:23.0 2013:21.1 2014:21.7 2015:21.8 2016:22.6 2017:22.1
- Current Expenditure: 2010:18.9 2011:19.8 2012:20.7 2013:19.7 2014:19.6 2015:20.4 2016:20.3 2017:19.9
- Capital Expense: 2010:2.6 2011:2.6 2012:2.2 2013:1.4 2014:2.1 2015:1.3 2016:2.3 2017:2.1
- Net lending (+)/borrowing (-) (fiscal balance): 2010:-2.5 2011:-4.1 2012:-2.6 2013:-1.5 2014:0.8 2015:0.1 2016:-0.6 2017:-0.3
- Primary balance: 2010:-2.4 2011:-4.1 2012:-2.5 2013:-1.4 2014:1.0 2015:0.3 2016:-0.2 2017:0.1

* Does not reflect the introduction of the VAT, planned for 2017.

### Financial soundness indicators, 2009–15 (selected series with exact values)
Capital adequacy ratios (percent)
- Regulatory capital to risk-weighted assets: 2009:16.9 2010:15.6 2011:14.1 2012:8.8 2013:13.6 2014:11.4 Jun-15:11.1 Sep-15:11.0
- Capital to assets: 2009:10.6 2010:9.6 2011:8.6 2012:6.3 2013:7.3 2014:6.2 Jun-15:7.0 Sep-15:7.0

Asset quality ratios (percent)
- Bad loans to total loans 1/ 2/: 2009:2.9 2010:5.9 2011:7.2 2012:9.6 2013:13.9 2014:16.1 Jun-15:16.9 Sep-15:18.4
- Nonperforming loans to total loans: 2009:6.9 2010:11.9 2011:34.1 2012:20.3 2013:42.4 2014:43.1 Jun-15:45.8 Sep-15:45.6
- NPL coverage ratio: 2009:23.9 2010:27.8 2011:22.6 2012:42.5 2013:26.7 2014:30.3 Jun-15:28.6 Sep-15:29.4

Earning and profitability (percent)
- Return on assets (ROA) 4/: 2009:0.1 2010:-0.1 2011:-3.3 2012:-2.2 2013:-0.6 2014:-1.8 Jun-15:-0.4 Sep-15:-0.8
- Return on equity (ROE) 4/: 2009:0.5 2010:-0.7 2011:-28.8 2012:-22.5 2013:-7.8 2014:-21.4 Jun-15:-5.5 Sep-15:-11.5

Liquidity (percent)
- Liquid assets to total assets: 2009:29.9 2010:27.9 2011:25.8 2012:28.0 2013:29.6 2014:32.4 2015Q1:32.0 2015Q1:31.0
- Liquid assets to short-term liabilities: 2009:57.1 2010:67.4 2011:57.6 2012:58.7 2013:60.6 2014:65.4 Jun-15:62.3 Sep-15:57.2
- Loans to deposits: 2009:76.5 2010:85.0 2011:76.8 2012:91.8 2013:86.7 2014:80.0 2015:78.9 2015:79.3

Notes:
- 1/ Liquid assets as a share of liquid liabilities, excluding inter-bank loans.
- 1/ For the central government. Does not include possible costs of future bank recapitalization.
- 2/ For 2015, latest available.
- 1/ Based on bank balance sheet data.
- 2/ Last observation refers to December 2015.
- 3/ Last observation refers to bad loans net of provisions as of December 2015 and capital as of September 2015.
- 4/ Before extraordinary items and taxes.

### Risk Assessment Matrix — principal risks, likelihood, impacts, and policy responses
- Structurally weak growth in Italy and the euro area
  - Risk relative likelihood: High
  - Impact if realized: High
  - Policy response:
    - Let automatic stabilizers work.
    - Postpone fiscal adjustment; reevaluate periodically.
- Further modest public bank recapitalizations
  - Risk relative likelihood: High
  - Impact if realized: Medium
  - Policy response:
    - Accelerate establishing access to external financing for the sovereign.
    - Accelerate AQRs.
    - Prepare adjustment/contingency plans, based on AQR results.
- Failure to clean up bank balance sheets, leading to a loss of confidence in the system
  - Risk relative likelihood: Medium
  - Impact if realized: High
  - Policy response:
    - (Implied) address balance sheet weaknesses to avoid large public recapitalization needs.
- Higher medium-term growth from inclusion in Italy’s tax whitelist
  - Risk relative likelihood: Medium
  - Impact if realized: Medium
  - Policy response:
    - Stick to reform plans despite upside.
- Loss of cross-border or domestic electronic payment services
  - Risk relative likelihood: Low
  - Impact if realized: Medium
  - Policy response:
    - The authorities are working on mitigating the risk by setting up a domestic electronic payment services provider.
- Tensions with neighboring Italy resurface
  - Risk relative likelihood: Low
  - Impact if realized: High
  - Policy response:
    - Enhance focus on international relations.
    - Start the credit register on schedule.
    - Continue to work towards early adoption of OECD initiative for exchange of tax information.

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

### Appendix II. Public Debt Sustainability

### _cr16111 - Appendix II. Public Debt Sustainability

### Debt trajectory and projections
- Gross central government debt is projected to stabilize below 22 percent of GDP.
- Before the crisis, gross debt stood below 15 percent of GDP; net debt was negative as the government held cash buffers in excess of 15 percent of GDP.
- Financial support to CRSM amounting to 13 percent of GDP (11 percent provided by the central government and 2 percent by the Social Security Institute) increased gross debt to more than 20 percent of GDP by 2013, while cash buffers decreased to below 4 percent of GDP.
- In 2014, gross public debt temporarily dropped to 19 percent of GDP due to fiscal over-performance.
- The fiscal balance is expected to deteriorate modestly in 2015–2016 and over the medium term, including due to higher capital expenditure.
- The government is in the process of issuing a €40 million bond to recapitalize CRSM.
- In light of these developments, public debt is projected to stabilize at 21–22 percent of GDP.

### Main risks and contingent liabilities
- The possible need for further bank capital support represents the main risk to public finances and debt sustainability.
- A contingent liability shock scenario where further recapitalization needs amount to 20 percent of GDP—reflecting a combination of further capital needs from CRSM and other banks—would, without a change in the fiscal stance, dramatically increase public debt, reaching 42 percent of GDP by 2020.
- Such dynamics may not prove sustainable in a country without a track record of sovereign bond issuance and untested ability to access external financing.

### Fiscal adjustment scenarios and staff recommendations
- Staff’s suggested adjustment of 1 percent of GDP (compared to 2016 projections excluding additional capital expenditure) over four years would:
  - Put public debt on a clear downward trend and provide fiscal space for contingent liabilities.
  - Under these adjustments, debt would peak below 42 percent of GDP and decrease to 36 percent of GDP by 2020, even in the presence of the above-mentioned contingent shock.
- Baseline projection: public debt stabilizing at 21–22 percent of GDP absent further shocks.
- Contingent-liability shock (20 percent of GDP) without adjustment: public debt reaching 42 percent of GDP by 2020.
- Contingent-liability shock plus the recommended fiscal adjustment (1 percent of GDP over four years): debt peaks below 42 percent and falls to 36 percent of GDP by 2020.

### Key fiscal and policy facts cited
- CRSM support: 13 percent of GDP total (11 percent central government; 2 percent Social Security Institute).
- Planned recapitalization bond: €40 million.
- Projected stabilization band for public debt: 21–22 percent of GDP.
- Contingent recapitalization shock modeled at: 20 percent of GDP.
- Staff adjustment recommended: 1 percent of GDP over four years.
- Projected debt under shock without adjustment: 42 percent of GDP by 2020.
- Projected debt under shock with adjustment: decrease to 36 percent of GDP by 2020.

*Source: IMF staff report — Appendix II. Public Debt Sustainability.*

### introduction of VAT will not cause major technical difficulties. The new regime should enter

### _cr16111 - introduction of VAT will not cause major technical difficulties. The new regime should enter

### VAT introduction
- The new regime should enter into force in 2017, following a long and complex dialogue with all interested stakeholders.
- The reform is expected to be initially neutral with respect to tax revenues, while improving the efficiency of the tax system and, over time, enhancing tax compliance.
- The VAT rates have not been finalized yet, but, most likely there will be two or three different rates for different product categories with the highest rate expected to be lower than the Italian equivalent.

### Financial sector: resilience, legacy issues, and supervisory reform
- Banking sector capitalization, with the exception of CRSM, is in line with supervisory regulatory requirements.
- The banking system liquidity situation, despite pressures related to the Italian Voluntary Disclosure program, does not reveal, at this time, systemic risks.
- The crisis legacy remains heavy, as the level of NPLs is still high.
- Authorities are aware of challenges and stand ready to strengthen regulatory and supervisory standards and facilitate the transition to a new phase of stabilization and growth.
- Authorities see merit in conducting individual Asset Quality Reviews on the largest banks, most likely during the already planned on-site inspections.
- The fourth intervention on CRSM regulatory capital underscored again the urgency to strengthen the largest Sammarinese bank and put it on a path to full recovery expeditiously.
- Authorities recognize risks arising from contingent liabilities related to this last financial rescue; those risks were weighed against the major risk of a systemic bankruptcy.
- Work is underway to minimize in the future the state commitment in CRSM, with the aim of completely dismissing its participation in the bank, once it has been restructured and brought back to profitability.
- The government has received technical assistance from the Fund on CRSM-related issues and is carefully evaluating the related recommendations.
- The newly appointed senior management of the Central Bank has started working with the Bank’s staff to enhance supervisory and regulatory capacity in line with international best practice.
- The Central Bank stands ready to play a crucial role in enhancing regulation and supervision, although at this juncture it would need additional resources and funds to fully fulfill its tasks.
- Authorities value in-depth technical discussions with Fund staff on improving the banking resolution framework and implementing Basel III supervisory requirements.

### AML/CFT and tax transparency
- After MONEYVAL and the EU Commission acknowledged San Marino’s progress in advancing the AML/CFT legal framework towards full compliance with the FATF requirements and the European AML/CFT Directives and regulation, the country has started to work on a national risk assessment program which will further strengthen the implementation and enforcement of the regulations.
- San Marino is continuing to work on the implementation of the OECD program for the automatic exchange of tax information.

### Structural reforms, labor market, and business environment
- Authorities are pursuing a modern, wide-ranging and effective new business model to improve market sentiment, strengthen accountability and transparency, and establish a new course for development.
- Underlying objectives shaped the spending review, tax reform, progress in anti-money laundering issues, as well as scientific and cultural scheme currently in progress.
- Specific measures were adopted to improve the business environment and ease access to the labor market.
- Since the law on e-commerce was approved, the number of enterprises active in product scouting and basic e-commerce services increased dramatically.
- The high-tech business incubator established to facilitate the development of a scientific and technological park multiplied its connections with highly reputable researchers and universities, paving the way for the establishment of joint-research projects.
- Following programs launched after the consultancy of Prof. Ichino, vocational and training programs have continued to be promoted.
- Ad hoc rules were adopted to ease the recruitment of specialized workers and thus facilitate the reduction of human resources constraints given the size of the country.
- The Selected Issues Paper provided additional food for thought on specific regulatory limitations that might hamper a smooth functioning of the market; Fund recommendations in this area will be carefully considered.
- Authorities continue to consider opening the real estate market to foreign investments while preserving adequate safeguards for the territory, considering its peculiarity and dimension.
- Among main priorities are continuing negotiations for an Association Agreement with the European Union, aimed at completely aligning San Marino with the EU four freedoms’ framework, and the finalization of the Memorandum of Understanding between the Central Bank of San Marino and the Bank of Italy.
- The credit register implementation is underway and prospects for a swift completion of the exchange of credit information with Italy are described as very positive developments.
- Maintenance of a constructive relationship with Italy is paramount to revamp the economy and ensure recognition of efforts to move away from an image of an opaque tax-haven.

### Statistics and capacity constraints
- Authorities believe the Selected Issues Paper’s overall tone is too negative and does not adequately reflect the severe capacity constraints in terms of human and financial resources that San Marino faces.
- Some suggested measures require careful assessment as to their macroeconomic impact and broad ownership to ensure successful implementation and positive outcomes.
- Interventions to instill health and vibrancy to the national banking system require careful assessment and broad ownership.
- Authorities are committed to resume work on strengthening statistical information in cooperation with the IMF and pooling the Central Bank and the Ministry resources at national level.

### Conclusion and commitments
- Authorities reaffirm their commitment to implement a reform agenda that promotes an internationally transparent, open, flexible and competitive Sammarinese economy.

*Source: _cr16111 - introduction of VAT will not cause major technical difficulties. The new regime should enter*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16111.pdf_