The updated DSA suggests that theexternal risk of debt distress for Vanuatu remains moderatewith limited space to absorb shocks. All external debtindicators remain below the relevant indicative thresholdsunder the baseline scenario, incorporating the averagelong-term effects of natural disasters on growth and thefiscal and current account balances. A tailored naturaldisaster shock, reflecting Vanuatu’s vulnerability todisasters, would cause the present value (PV) of public andpublicly guaranteed (PPG) external debt-to-GDP ratio tobreach the threshold from 2024 onwards. The overall risk ofdebt distress is assessed as moderate. Although the PV ofthe public-debt-to-GDP ratio remains below the 55 percentbenchmark under the baseline scenario, thepublic-debt-to-GDP ratio would breach the authorities'debt ceiling of 60 percent by 2025. Moreover, a tailorednatural disaster shock would lead to a significantdeterioration in debt sustainability, breaching thebenchmark. The breach of the authorities’ debt ceiling andof the benchmark indicates the need for rebuilding fiscalbuffers and enhancing resilience against shocks, includingfrom natural disasters. This requires both stronger revenuemobilization measures, including an introduction of theproposed income taxes, and expenditure rationalization inthe medium term. When contracting new public infrastructureprojects, the authorities are encouraged to seek grants orconcessional loans as much as possible to contain its debt burden.
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