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Sustentabilidade das finanças públicas: evidência empírica em São-Tomé e Príncipe

Dilson Tiny

Research Group: Governance, Economy and Citizenry

Supervisor(s): Emanuel Leão


The theme of this doctoral dissertation is the sustainability of public finance in São Tomé and Príncipe. Given the complexity and highly-faceted nature of the issues to be addressed, the empirical research of this thesis proceeded in four stages, which reflects different and complementary analytical and operational perspectives. The first stage diagnoses Santomean economy and analyses the implications of macroeconomic data for the sustainability of public finance. It is found that resiliencebuilding against external shocks constitutes one of the major challenges Santomean economy faces. Over the decades, the country’s macroeconomic performance has been characterized by highly volatile economic growth, important currency depreciations prior to the 2010 currency peg, excessive external deficits and increasing financial needs related to the implementation of programs to reducing poverty and bolstering economic development. These economic vulnerabilities, which reflect, among others, country’s specificities and the characteristics of a Small Developing Island State, have also had a huge impact on the deterioration of public finance and the higher growth of public debt. The second stage applies econometric analysis. The stationarity tests for public debt and public debt-to-GDP ratio variables, as well as a cointegration tests between public expenditure and public revenue are developed. The results of these tests suggest that the public debt in São Tomé and Príncipe is not on a sustainable path. The third stage of this study forecasts the future evolution of the public debt-to-GDP ratio and analyses scenarios and stress tests. The analysis of the debt-to-GDP’s scenarios, given the variations of its determining fators, suggests that the public debt-to- GDP ratio is mainly sensitive to economic growth and the primary deficit. Furthermore, the stress tests suggest that, should there be an exchange rate crisis, the magnitude of the currency depreciation would be higher and the ratio of debt to GDP would reach unsustainable levels. The fourth stage of this analysis of public finance sustainability in São Tomé and Príncipe, while relying on the analysis carried out during the previous stages, incorporates the uncertainties stemming from the evolution of the determinants of the public debt. In this regard, the stochastic simulation of the debt-to-GDP ratio is applied and derived using the historical average of the variance-covariance matrix of the determinants of the public debt-to-GDP ratio. The model has identified 1000 possible paths for the public debt-to-GDP ratio in São Tomé and Príncipe and helped quantify the probabilities of the evolution of the debt-to-GDP ratio different paths with reference to a baseline. This research is the first one that applies stochastic simulation to evaluate the sustainability of public debt in São Tomé and Príncipe and is also among the first few conducted in low-income countries.

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