Subnational Debt Sustainability Analysis
Case Study – DSA using Analytica
Buenos Aires, Argentina
Buenos Aires: Issues of Interest • Defining sustainability at sub-national level:
– Buenos Aires: Federal Fiscal Responsibility Law – Fiscal Rules – Nominal growth of primary expenditures < GDP growth
• PEt=TEt-iEt-INV.INFt-INV.MULTt
– Budget equilibrium• BEt=TRt-(TEt-CE.MULTt-INV.INFt)
– Debt Service < 0.15*NCR (Excluding transfers to municipalities)• If Debt Service > 0.15 * NCR Primary Surplus required
• Defining alternative scenarios and values for uncertain variables: – Joint shocks to macroeconomic variables that affect budget and debt variables– Extra-limit debt scenarios: With and without World Bank loan
• Modeling SN specific features:– Buenos Aires has a structural fiscal problem arising from increased burden of
public expenditures linked to decentralization policies coupled with limitations imposed to sources of (tax) revenues
– Hence, extraordinary revenues have played a major role– And an wide array of financing sources have had to be devised– Several financing instruments (mainly bonds) issued in local and foreign market
Buenos Aires- Basic Model• Developed as one of the inputs for the provincial development
plan, which focuses on public policy areas that are under provincial control:– Fiscal space and sustainability– Education– Infrastructure and logistics
Projection horizonSubmodels
Alternative scenarios
Budgetvar iables
Macrovar iables
Debtdynam ics
Real GDP grow th -Baseline and
Alternative
Real GSDP grow th -Baseline and
Alternatives (2)
CPI inf lation -Baseline and
Alternative
Base Year Time HorizonTimeIndicators
Grossfinancing
needs (GFN)
Macro – Sub Model• Risk to outlook from structural primary deficits compounded by
potential macro volatility CPI Inflation (official vs own estimates) and CER
Growth GDP
Exchange rates
Stochastic shocks
Growth GSDP
AR$/US$ w ithshocks
AR$/US$
CER
Pass-through factor CPI-GDPdeflator
(ow n estimates)
Nominal GSDPgrow th w ith
shocks
Nominal GDPgrow th w ith
shocks
Real GDP grow thBaseline
GDP deflatorinflation
Real GDP
GDP deflator
Nominal GDP
Real GDP grow thrate
Real GDP grow thAlternative
Real GDP grow th -sd
Differentialbetw een
grow th rate ofnominal GSDP
and GDP
Stochas ticm odule
CPI inflationw ith shocks
CPI inflation(ow n estimates)
CPI inf lationAdjustment factor
(ow n estimate)
Joint StochasticShocks
CPI inflation Baseline
CPI inflationAlternative
CPI inflation - sd
Depreciation rate(AR$/US$)
AR$/EUR
AR$/EUR w ithshocks
Nominal GDPgrow th
Budget VariablesGross Operating Balance: GOBt = TRt - CEt
Primary Balance: PBt = (TRt – iRt) – (TEt – iEt)Overall Balance: OBt = TRt – TEt
Revenue Expenditure
GrossOperatingBalance
Overall BalancePrimary Balance
Shock to PrimaryBalance
Gross Financing Needs
Gross financing needs (GFN)
Coverage of GFN
Gross f inancing needs(GFN)
TotalDebt Service
Primary Balance
Initialinterest payments
TotalInterest Payments fromIO, bonds and NG debt
Total Amortizations Total Interests
New debt -Bond X issuance
New debt -Disbursements IO
Current transfers from NG and other current revenue
Tax revenue
Non-tax revenue
Tax revenue
Initial non-taxrevenue Non-tax revenue
Initial other currentrevenue
Initial currenttransfers from NG
Current transfersfrom NG
Current tranfers fromNG and other current
revenueOther current
revenue
Capital revenue (own and capital transfers from NG)
Total Revenues
Current revenue
Initial ow n capitalrevenue
Initial capitaltransfers from NG
Reduction in f inancialinvestment
Capital revenueCapital transfers
from NG
Ow n capital revenue
Current revenue
Total Revenues
Net current revenue
RevenuesIn line with FFRL net current revenues defined as:NCRt=CFRt-TRANS.MUNICt
Own tax revenue
Turnover tax
Real estate tax
Vehicle tax
Stamp tax
Energy tax
Other taxes
Initial energy tax
Initial turnover tax
Initial real estate tax
Initial other taxes
Initial stamp tax
Initial vehicle tax
Ow n taxrevenue
Turnover taxgrow th
Real estate taxgrow th
Vehicle tax grow th
Stamp tax grow th
Energy tax grow th
Regulation taxgrow th
Energy tax -Elasticity
Turnover tax -Elasticity
Real estate tax -Elasticity
Stamp tax -Elasticity
Regulation tax -Elasticity
Vehicle tax -Elasticity
Tax revenue growth elasticities to sub-national real GDP growth are considered
Tax Sharing with National Government
Tax-sharing with NG
Social securitycontributions
Co-participation law
Other taxes from NG
Initial capital gain tax
Initial co-participation law
Initial other taxes from NG
Initial school transfers
Initial social securitycontributions
Tax-sharing w ithNG
National taxgrow th
National tax -Elasticity
Current Expenditures: Burden from decentralization compounded by increased personnel expenditures
Current expenditure
Initial personnelexpenditure
Initial goodsexpenditure
Initial non-personnelexpenditure
Goods expenditure
Non-personnelexpenditure
Personnel expenditure
Consumptionexpenditure
Shock to personnelexpenditure
Personnelexpenditure grow th
Pool of personnelgrow th
Initial tranfers toMunicipalities
Initial transfers toprivate sector
Transfers toMunicipalities and
private sector
Transfers to privatesector
Transfers toMunicipalities
Initial social securityspending
Social securityspending
Current expenditure
TotalInterest Payments from IO, bonds
and NG debt
Capital Expenditures
Capital expenditure
Initial real directinvestment
Initial capital transfers toMunicipalities
Initial f inancial investment
Capital transfers toMunicipalities
Capital expenditure
Real direct investment
Debt Dynamics (1)
Initial debt IO (US$) Debt IO (US$)
InternationalOrganisations IBRD
& IADBInitial amortizations IO
(US$)
New debt -Disbursements IO (US$)
DebtIO (all)
Initial interest payments IO(US$)
AmortizationsIO (all)
Interest payments IO (all)
Initial amortizationNon-indexed Bonds AR$
Bonds in US$
Initial debt Non-indexedBonds AR$Non-indexed Bonds
in AR$
Bonds in EUR
Initial debt Bonds US$(US$)
Initial debt Bonds EUR(EUR)
Initial amortization BondsUS$ (US$)
Initial amortization BondsEUR (EUR)
Debt Non-indexed BondsAR$
Debt Bonds US$ (US$)
Debt Bonds EUR (EUR)
Debt Bonds US$
Debt Bonds EUR
Initial interest paymentsNon-indexed Bonds AR$
Interest payments BondEUR Interest rate Bonds EUR
Interest payments BondUS$ Interest rate Bonds US$
Amortizations Bonds US$
Amortizations Bonds EUR
Debt Dynamics (2)
DebtBonds (all)
Interest payments Bonds(all)Amortizations Bonds (all)
NG debtCER-indexed bonds
Accumulated capitalBOGAR
Monthly interest rate PUM
Debt PUM Interest payments PUM
Capital Bono Malvinas
Capital PUM
Capital BOGAR
Monthly amortization rateBono Malvinas
Monthly amortization ratePUM
Monthly amortization rateBOGAR
Amortization BonoMalvinas
Amortization PUM
Amortization BOGAR
Initial debt BOGAR(at end-2008)
CER-indexedBonds in AR$
Initial debt Bono Malvinas(at issuance date)
Accumulated capital BonoMalvinas
Interest payments BonoMalvinas
Monthly interest rate BonoMalvinas
Debt Bono Malvinas
Initial debt Bono Malvinas(at end-2008)
Initial debt PUM(at issuance date)
Initial debt BOGAR(at issuance date)
Accumulated capital PUM
Monthly interest rateBOGAR
Initial debt PUM(at end-2008)
Debt BOGAR Interest payments BOGAR
Debt Dynamics (3)
Total Debt
AmortizationsNG debt (all)
Interest paymentsNG debt (all)
Debt FFNG debt FiduciaryFunds (FF)
Initial debt FF Initial amortization FF Initial interest payments FF
Initial Amount Convenio2007
Initial PAF/PFO(2004-07)NG debt PAF/PFO
(2004-07)
Debt PAF/PFO(2004-07)
Initial amortizationPAF/PFO (2004-07)
Initial interest paymentsPAF/PFO (2004-07)
Initial amortizationConvenio 2007 Debt Convenio 2007
Initial interest paymentsConvenio 2007
DebtNG (all)
Total Amortizations Total Interests
NG debt Convenio2007
New debt - Bond X New debt -Bond X issuance Amortizations Bond X Debt Bond X Interest payments Bond X Interest rate Bond X
Sustainability Analysis: The Federal Fiscal Responsibility Law
Personnel expenditure(% of NCR)
Real direct investment(% of NCR)
Gross OperatingBalance
(% of NCR)
Primary Balance (% ofNCR)
Gross f inancing needs(% of NCR)
Debt service(% of NCR)
Debt(% of NCR)
Overall Balance (% ofNCR)
Set of indicators used to follow compliance with the FFRL:
Joint Shocks to Macro Variables
Parametric Multivariate Distributions
Creating an array of mutually correlated distributions:
Creating a single univariate distribution correlated with another existing dist: Reshaped distributions:
Arrays with serial correlation
Distributions on Linear Regression coefficients
JointStochastic
Shocks
I
J
PastReal GDPgrowth rate- historical
series
Exchangerate
AR$/US$ -historical
series
CPI inflationrate -
historicalseries
Real GDPgrowth rate- historical
mean
Exchangerate
AR$/US$ -historical
mean
CPI inflationrate -
historicalmean
Variance-covariance
matrixMean
Wishart(cv,n,I,J)Inverted Wishart(Psi,n,I,J)
RegressionDist(Y,B,I,K)
Gaussian( m, cv, i, j ) Dirichlet ( a, i )BiNormal (m, s, i, c ) Multinomial (n, theta, i )
Correlate Dists (d, rc, i, j )
Correlate With (s, ref, rc )
Uniform Spherical (i, r )MultiUniform ( c, i, j, lb, ub )
SampleCovariance
samplecorrelation
Normal_correl(m, s, r, y)
SameIndexes(x,y) UniqueRank
Multinormal(m,s,c,i,j)
Dist_reshape(x, newdist)
Normal_serial_correl(m,s,r,i) Normal_additive_gro(x,m,s,r,i) Normal_compound_gro(x,m,s,r,t)
Dist_serial_correl(x,r,i) Dist_additive_growth(x,g,r,i) Dist_compound_growth(x,g,r,i)
RegressionNoise(Y,B,I,K,C) RegressionFitProb(Y,B,I,K,C)
Results: Debt Service (% NCR) Baseline
Primary Balance (%NCR) Baseline
Gross Financing Needs (%NCR) baseline
Personnel Expenditures (%NCR) Baseline
