Policy Based Partial Credit Guarante (PBPCG) Programme
- Reference: P-SC-K00-001
- Approval date: 02/12/2009
- Start date: 02/12/2010
- Appraisal Date: 15/11/2009
- Status: ApprovedAPVD
- Implementing Agency: MINISTRY OF FINANCE
- Location: Seychelles
1. Programme components and expected results
1.1.As indicated previously, one objective of the GoS's reform programme is to put the country's debt profile on a sustainable path. In order to achieve this, GoS is taking a number of steps, including: strengthening public finance management (PFM), improving public debt management and consolidating public finances by reinforcing fiscal revenue and tightening expenditure. These measures will help reduce the debt burden and rebuild investor confidence in the country. The proposed PBPCG programme will reinforce support to the GoS in implementing these steps by focussing on strengthening public debt management.
Strengthen Public Debt Management
1.2.Focussing on this element will enable the Bank to reinforce its dialogue with Government on strategic issues relating to financial governance. Indeed, key public financial management (PFM) issues have already been earmarked in the Bank's EGRP. Nonetheless, in line with the GoS's well sequenced reform programme, there is a need for additional focus on public debt management, in particular the commercial debt restructuring.
1.3.As mentioned earlier, the Government has already succeeded in obtaining debt relief from the Paris Club and has also enacted a new Public Debt law in late 2008. Further, the Government is finalizing a medium-term debt management strategy and annual borrowing plans (as from the 2010 budget). These are two prior conditions for the disbursement of the second tranche of the EGRP in 2010.
1.4.In spite of this progress in debt management and re-profiling, the bulk of external debt remains with commercial creditors. Hence, as the next critical step in debt re-profiling, the Government needs to reach a mutually satisfactory agreement with external commercial creditors on favourable debt relief terms.
1.5.The PBPCG programme will support these endeavours to ensure an improved sovereign rating and successful debt restructuring with commercial creditors by end-first quarter 2010. This will also intrinsically complement measures outlined in the Bank's budget support programme to improve public debt management.
2 Description of the Instrument
2.1 The Policy Based Partial Credit Guarantee is an undertaking by the Bank to pay up to US$ 10m in interest payments of the New Discount Bonds that will be offered to investors during the Seychelles exchange offer.
2.2 This instrument is a 16 year rolling non re-instatable guarantee. A rolling guarantee is such that if a guarantee is not called it is "rolled over" to the next guarantee payment date until the guarantee agreement expires. Therefore, if the Trustee does not call on the guarantee to pay the interest due on any given interest payment date, the guarantee will be passed on to the following date. This will occur for as long as no disbursement occurs and until the Guarantee Termination date (16 years). If, at any point in time, a disbursement is made on a portion of the guarantee amount, at the next interest payment date, only the unpaid guarantee amount (referred to as the relevant amount) can be called. This process will be repeated for as long as any portion of the guarantee maximum amount remains unspent
The programme's specific objectives are to facilitate commercial debt restructuring whilst reinforcing financial governance. This will help release resources to enable the GoS to pursue its development goals, as outlined in 'Seychelles Strategy 2017'.
3.1. Link with National Development Plan and Interim Strategy Note 3.1.1.The Policy Based Partial Credit Guarantee (PBPCG) programme is aligned with the Bank's Interim Strategy Note (ISN) 2009-2010, which in turn is consistent with the Government's development programme 'Seychelles Strategy 2017'. The thrusts of Strategy 2017 are promotion of sound macroeconomic management, competitiveness and good governance, equity and sustainability. The expected outcomes of the Strategy are presented in Annex 8. The guarantee programme is also consistent with the Government's frontloaded reform programme (see Section 2.3), which includes as one key objective the adoption of a comprehensive debt restructuring strategy.
3.1.2.The Bank's ISN comprises one pillar, namely 'support the reform programme to achieve sustainable growth', with the lending programme focused on the provision of a budget support operation, and non-lending operations focused on technical assistance and country analytical work, including a joint Public Expenditure Review (PER) with the World Bank.
3.2. Main analytical works underpinning
3.2.1.The design of the guarantee programme has been guided by the Bank's 2009-2010 Seychelles Interim Strategy Note (April, 2009), the recently approved Bank EGRP budget support operation (July, 2009), the IMF Article IV Consultation and Request for a Stand-By Arrangement Staff Report (December, 2008), the Second Review under the Stand-By Arrangement (July, 2009) and the IMF Debt Sustainability Analysis (March, 2009).
3.2.2.Important conclusions from these upstream studies are that:
(i) macroeconomic challenges relating to the ongoing country's debt burden are significant;
(ii) government commitment to economic reforms has remained resilient since mid-2008; and
(iii) comprehensive public debt restructuring, involving a substantial reduction in the overall debt burden, is critical for putting public debt back on a sustainable path.
3.2.3.In addition to the Bank's own assessment, the guarantee programme design benefited from intensive consultations with country stakeholders including government officials, donors (notably the IMF, World Bank and the EC), as well as Seychelles' financial and legal advisors.
3.3. Lessons from past and on-going similar or quasi-similar operations
3.3.1.This is the first time that a DFI will offer a partial credit guarantee under the framework of debt re-structuring. Sovereign partial credit guarantees have been offered by sister institutions in the past to facilitate the access of countries to capital markets. In spite of the uniqueness of this operation, some lessons can be drawn from these sister institutions. Private sector guarantees, as well as policy-based operations in Seychelles and across Africa have also been used to enrich the proposal.
3.3.2.The World Bank provided a rolling re-instatable policy based guarantee for Argentina on a series of zero coupon bonds in 1999 and one for a Colombia bond issue in 2001. The main objective of these guarantees was to help the beneficiary countries to mobilize new resources after a protracted period of not being able to access international capital markets. In the case of Argentina, the guarantee was first called in 2002. Following this, Argentina did not repay the World Bank within the 60 days cure period that would have allowed the guarantee to be reinstated and rolled over to the next zero coupon series. As per the agreement, the World Bank extended the terms for reimbursement to a loan of four and half years with a three year grace period. The bond holders were not completely clear on this arrangement between the World Bank and Argentina (even though it was disclosed in the prospectus). They had expected the World Bank to exert sufficient pressure on Argentina to cure the outstanding payment within the 60 day period. Therefore, the outcome of this guarantee operation was perceived badly by both bond holders and the market. The main lessons learned are the need to be clear on the scope of the guarantee and to avoid sending the wrong signal to creditors. Also, key elements like the economic and financial situation of the country, as well as the relationship between the country and donors - especially regarding the debt management strategy, growth prospects and reform implementation - require thorough assessment (as per ADB's general and technical preconditions for a partial guarantee as detailed in Annex 7) .
3.3.3.The Bank's experience in providing guarantee facilities has been concentrated in private sector operations . The main purpose of these guarantees was to provide partial guarantees of small loans provided by institutions to SMEs. Although these experiences are still relatively recent, these kinds of operations have been successful (no guarantees have been called to date) and translated into a higher leverage ratio.
3.3.4.Across Africa, the major lessons coming from Policy Based Loans (PBL) are articulated around the identification of appropriate reforms, the timeframe of implementation and appropriate capacity building. For example, an important recommendation is to complement the PBL operation with institutional support in order to strengthen capacity at the level of the country/responsible ministry. A PBL is also a key instrument in donor coordination and reinforces dialogue between donors and the country. As a result, this proposal will ensure coordination and complementarity with the Bank's current budget support operation.
3.4. Collaboration and coordination with other donors
3.4.1.Donors have expressed significant support for the Bank's proposed guarantee programme. Given Seychelles' remarkable performance in implementing their reform agenda (strong fiscal and monetary discipline, and firm government ownership), the IMF will continue to support Seychelles' medium-term structural reform programme through a recently (November 2009) negotiated three-year successor arrangement under the Extended Fund Facility (EFF). The IMF has highlighted that successful commercial debt restructuring is a key precursor to the medium-term programme in order to secure a sustainable fiscal and macroeconomic future for the Seychelles. As a result, the Bank's guarantee programme will complement what the IMF and other donors are doing, given that it would have significant leverage in helping the country succeed in its commercial debt rescheduling, which is part of the broader debt reduction strategy supported by the IMF and other donors. Furthermore, the IMF has noted that a Bank guarantee would fit within the non-concessional borrowing limit, defined under SBA programme.
3.4.2.In late October, following discussions between Seychelles' transaction advisers and the World Bank, the GoS requested a policy-based guarantee from the World Bank to provide further assistance to the commercial debt restructuring. Although the timeframe is such that it will be challenging for this request to receive World Bank Board approval before the public exchange offer launch date, planned for mid-December, the World Bank is nevertheless exploring how to respond positively to the GoS request in a manner and timeframe that can also add value to the restructuring. The concept note for World Bank participation is due to be discussed by their Operations Committee in early December.
3.5. Bank's comparative advantages and added value
3.5.1.The Bank's guarantee will improve the attractiveness of the exchange offer between Seychelles and existing bondholders by partially mitigating the risk profile of the restructured bonds. This will likely improve the level of participation of existing bondholders in the exchange offer and the terms (greater nominal value written off and lower coupons) for the Seychelles and, thus, it's debt profile going forward. Ultimately, the authorities hope that it will be easier to place the restructured issue with a Bank guarantee, as bondholders view multilateral involvement as a demonstration of support by the international community for the Government's reform programme.
3.5.2.A Bank guarantee may also be critical in ensuring that more than 75% of bondholders respond and agree to the conditions of the exchange offer. Crossing this threshold (75%) will allow the supermajority to modify the terms, under the collective action clause, of bonds held by any creditors who do not respond. This will, thus, ensure that all debt under the exchange offer is rescheduled and, secondly, dramatically reduce the risk of expensive lawsuits against Seychelles from holdouts acting against the interest of the majority.
3.5.3.Finally, Section 5.2 provides a financial analysis of the monetary value of the Bank's partial guarantee.
3.6. Application of Bank Group partial guarantee policy and good practice principles on conditionality
3.6.1.The programme will follow principles and modalities to guide the use of Bank guarantees as indicated in the "Guiding principles for Bank Guarantees (2000)" and in the "Bank Policy on Guarantees (2004)". "Eligible country should have demonstrated a strong track record of performance. Referring to the conclusion of the IMF mission in October 2009 "strong progress is being made by the Seychelles authorities in their reform programme. The reform programme is front-loaded and is on track and is achieving its economic stabilization and reform objectives". Moreover, macroeconomic indicators have improved and good progress is being made with the overall debt restructuring strategy. Due to the specific nature of the programme, the policy based guarantee will apply good practice principles on conditionality as requested in the PBL generic framework: "Reinforce ownership: The reform programme is fully owned by Seychelles and is built around Seychelles Strategy 2017, prepared by the Government through broad-based consultations with stakeholders. The Government is committed to the successful negotiation of the commercial debt burden and has already hired international advisors to handle this. "Agree on a coordinated framework: The main development partners agreed on a series of parallel and synergistic interventions in support to the Government's reform programme. Even if the donors are not directly involved in the guarantee operation, the policies supported by the programme are directly linked to the IMF SBA. "Customize the accountability framework and modalities of Bank's support to country circumstances: The Bank's support reflects the Government's expressed intentions and is appropriate for a country that is heavily in debt, especially in terms of commercial debt. "Application of Bank Group policy on non-concessional borrowing: Seychelles is a MIC (category C country) which can only access the Bank's non-concessional resources. The guarantee amount requested falls in the country lending limit available for Seychelles.
3.7. Country readiness assessment and compliance with Bank Group safeguards policy
3.7.1.Since Board approval of the budget support, in July 2009, the country has shown remarkable progress in both implementing reforms and through improved macroeconomic indicators. Therefore, Seychelles meets the Bank's prerequisite conditions (general and technical) for a Partial Guarantee as comprehensively detailed in Annex 7.
Human development has been an essential element of all policies and national development plans since independence. As a result, Seychelles has already met the target for most of the eight Millennium Development Goals (MDGs), which has led to a Human Development Index (HDI) of 0.842 (United Nation's 2007/08 rankings), placing Seychelles highest in Africa, 50th in the world, and comparable to many OECD countries. In terms of GDP per capita, at about US$8,960 in 2008, the country ranked second highest in Africa. Other key indicators such as life expectancy, adult literacy rate, population growth rate, and gender equality compare favourably with achievements in developed countries. Such remarkable results on the social front are due to the country's comprehensive welfare system, which was largely financed through budget deficits. This system has recently, however, been questioned in terms of its sustainability regarding the country's current severe debt problems.
Given the substantial reforms at the end of 2008 (which have led to a contraction of the economy in the short to medium-term ), combined with the global economic slowdown and the change in Government approach from a universal to a targeted welfare system there is concern that poverty and vulnerability may be on the increase (around 18% of households are currently estimated to be living below the food poverty line). In order to counter this, the Government has recently established a Welfare Agency, supported by the World Bank, to better target Government expenditure to those most in need. So far, the initial requests for welfare assistance have been limited; however, should the demands for welfare assistance rise, significant resources have already been earmarked as part of the IMF programme,.
WALKER Richard Ancrum - EARC