DEBT VULNERABILITIES IN EMERGING AND LOW-INCOME …...Rising debt levels and shifts in the...
Transcript of DEBT VULNERABILITIES IN EMERGING AND LOW-INCOME …...Rising debt levels and shifts in the...
DEBT VULNERABILITIES IN EMERGING AND
LOW-INCOME ECONOMIES*
Debt side-event during UN GA Second Committee Meeting
October 23, 2018
*Paper prepared for the October 13, 2018 Development Committee Meeting in Bali.
OUTLINE
1
1. Debt Vulnerabilities in Emerging Markets (EMs)
2. Debt Vulnerabilities in Low Income and Developing Countries (LICDs)
3. A Multipronged Approach for Addressing Emerging Debt Vulnerabilities
Key messages
1. Public and corporate debt in emerging markets (EMs) have grown rapidly to near record highs,
although there is wide variation across countries. Gross financing needs are high and could rise if
downside risks to the global outlook materialize.
2. About 40 percent of low income developing countries (LICDs) are at high risk or in debt distress.
Rapid debt accumulation has been fueled by new sources of official and market-based finance.
3. Key drivers of debt build-up. To some extent reflects a desirable policy response to low commodity prices
and low interest rates. But in some cases weak macro-fiscal policy frameworks and shocks (security challenges,
natural disasters). “Hidden debt” contributed in some instances.
4. Public debt-to-GDP ratios are projected to remain contained in many countries, but policy
implementation and global risks could frustrate such an outcome.
5. Reforms tailored to country circumstances are needed. Fiscal adjustment supported by growth friendly
reforms; asset and liability management operations to smooth refinancing risks; greater transparency about and
management of off-balance sheet risks; stronger domestic resource mobilization; stronger debt management
capacity and project appraisal.
6. The World Bank and the IMF are pursuing a multi-pronged approach to help countries address debt
vulnerabilities: stronger debt analytics; more debt transparency (creditor outreach on sustainable lending and
improved data coverage); and improved debt/fiscal risk management, including scaled-up TA on debt management. 2
2. Debt Vulnerabilities in Emerging Markets
Public debt in EMs has risen substantially, approaching levels not seen since the
1980s debt crisis, driven by adverse shocks and policies.
4
EMs: Public Debt since 1880
(percent of GDP)
Note: Emerging Markets comprise countries that are neither advanced
economies, nor low-income developing economies.
Source: Fiscal Monitor, April 2018 .
0
20
40
60
2012 2013 2014 2015 2016 2017 2018*
EMs: Public Debt 2013 - 18
(percent of GDP)
EMs_avg.EMs_MedianNon-cmdty exporters_avg.
Note: Public debt covers general government gross debt. Commodity
exporters are countries where commodities account for at least half of
goods and services.
Source: World Economic Outlook Database, April 2018.
Corporate debt in EMs has also grown to record highs, adding to risks.
5
Source: Bank for International Settlement, Institute for International Finance.
0
20
40
60
80
100
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
EMs: Corporate Debt
(percent of GDP)
EMs EMs: 1995-2008 average EMs: 2003-08 average
Local currency denominated public debt increased until 2013. Rising non-resident
holdings of domestic debt adds to risks in some EMs.
6
Source: Sovereign Investor Base Dataset for Emerging Markets.
05
101520253035404550
As of end 2016 As of end 2017
EMs: Share of Local Currency Government Debt
Held by Foreign Investors
External debt carrying variable interest rates has risen markedly in recent years,
adding to debt portfolio risks
7
Source: International Debt Statistics.
-
1,000
2,000
3,000
4,000
5,000
6,000External Variable Rate Debt
(USD billions)
LIC Variable rate BRIC Variable rate Other EM Variable rate
LIC Fixed rate BRIC Fixed rate Other EM Fixed rate
EMs face a high volume of international bond redemptions in 2019-20 raising
refinancing risks when average credit quality has deteriorated.
8
Note: Aggregate includes 68 emerging & developing economies.
Source: Dealogic & World Bank Staff calculations
0.0
0.2
0.4
0.6
0.8
1.0
0
50
100
150
200
250
300
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
Perc
ent
of
GD
P
USD
Bill
ion
EMDE:
International Bond Redemptions
(USD billion and percent of GDP)
Total maturing bond amount Share of GDP (RHS)-200
-150
-100
-50
0
50
2012 2013 2014 2015 2016 2017 2018
Nu
mb
er o
f cr
edit
rat
ing
chan
ges
EMs: Change in
Sovereign Credit Ratings
(number of rating changes)
Downgrades
Upgrades
Net change
Source: International Institute of Finance & World Bank staff calculations.
While several EMs have adequate policy frameworks and buffers, there are some countries
with large external financing needs, high exposure to capital outflows, and low reserve
adequacy ratios that remain vulnerable to a debt crisis.
9
0%
50%
100%
150%
200%
250%
300%
0 10 20 30 40 50
Res
erve
s/A
RA
met
ic
Average external financing needs, 2018-20
EMs: External Financing Needs & Reserves
(percent of GDP & ARA metric)
Reserve
adequacy range
High external financing requirements
Source: World Economic Outlook Database,
April 2018 & World Bank staff calculations.
About half of countries with
external financing needs
above 15 percent of GDP
have reserve levels well
below IMF reserve adequacy
measures
2. Debt Vulnerabilities in Low-Income Developing Economies
Public debt in LIDCs has increased significantly since 2013, reflecting
adverse shocks and policies. “Hidden debt” has ultimately come to light in
some cases.
11
Note: Commodity exporters are countries where commodities account for at least half of goods and services. IDA FCS countries have either a) a
harmonized average CPIA country rating of 3.2 or less, or b) the presence of a UN or regional peace-keeping or peace-building mission during the
past three years. IBRD countries qualify only thanks to the presence of a peacekeeping, political, or peace-building mission.
Source: World Economic Outlook Database, April 2018.
Source: World Bank/IMF LIC DSA Database, September 2018.
Changes in the composition of debt (with increased reliance on costlier and
riskier sources of finance) and large international bond redemptions coming
due increase refinancing risks.
12
0.0
0.1
0.2
0.3
0.4
0
1
2
3
4
5
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
In p
erce
nt
of
GD
P
In b
illio
ns
of
USD
LIDCs: International Bonds
(USD billions & percent of GDP)
Total maturing bond amount Percent of GDP (RHS)
Source: Dealogic and World Bank staff calculations.
LIDCs: Change in Creditor Composition 2007 - 2016
(percent of GDP)
Source: International Debt Statistics.
Rising debt levels and shifts in the composition of debt have increased debt
vulnerabilities. The share of LICDs at high risk of or in debt distress has
doubled since 2013, reaching 40 percent in 2018.
13
25 25 2631 32 36 36 35
2925
20 20
31 3033
33 3436
43 4448
48
41 39
27 2622
24 21
2116 16 17
21
27 29
17 19 1911 13
7 5 5 5 513 13
0
20
40
60
80
100
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Low Moderate High In debt distress
Evolution of Risk of Debt Distress
(in percent of LIDCs with DSAs)
Source: WB/IMF LIC DSA Database.
3. A Multipronged Approach for Addressing Emerging Debt Vulnerabilities
Looking ahead, public debt is expected to remain contained, but important
risks lurk, requiring careful execution of fiscal policies and smooth debt
management
1. Public debt to GDP ratios are expected to ease slightly over the next 3-5 years in EMs and remain contained
in LIDCs. Financing needs forecasts show little change.
➢ These projections are based on assumptions of improving fiscal positions, steady growth, and stability in global growth and
exchange rates.
2. Key risks to the outlook include:
• Larger than anticipated increases in global interest rates (e.g. due to more rapid normalization of monetary policy in
advanced economies)
• Weaker global growth (e.g. due to curtailment of global trade and investment)
• Volatility in commodity prices (beyond the expected gradual decline over the medium-term)
• Poorly executed fiscal adjustments (e.g. with high impacts on growth, due to excessive focus on cutting investment)
• Outward contagion from unfortunate cases where countries do experience debt distress.
➢ It will be critical for countries to implement sound macro-fiscal frameworks, with supporting growth friendly reforms,
and to manage their debts well (to keep financing needs from spiking.
15
Tailored policy reforms that reflect country specific vulnerabilities will also
be important to insulate countries against risks:
16
Commodity exporters
• Steps to better insulate themselves from volatile commodity prices
• Diversification of their economic base over time
Large corporate debt exposures
• Implement macroprudential policies to mitigate financial sector risks.
• Structural policies to build resilience (like strengthening bankruptcy regimes)
High SOE/PPP exposures
• Improve transparency
• Improve fiscal risk management
• Strengthen corporate governance
LICDs (esp. those scaling up)
• Careful attention to rates of return and quality of investment
• Domestic resource mobilization
• Building capacity to manage debt
The World Bank-IMF have launched a multi-pronged approach to help
countries address debt vulnerabilities
17
Debt Analytics and Monitoring
• Implementation of revised joint Bank-Fund Debt Sustainability Framework (and the to-be-revised MAC DSA)
• Scale-up of analytics on debt issues and fiscal risks
• Strengthen early warning systems
Debt Transparency• TA to support recording, monitoring, and reporting of debt
• Better access to debt data and analysis from IMF and WBG
• Enhanced creditor outreach
Debt Management
• Scaled up debt management TA
• Tools to improve management of contingent liabilities
• Enhanced operational support to strengthen debt/fiscal policy frameworks
• Extend WBG Debt Reduction Facility
• Supportive IMF and WBG policy framework (Debt Limits Policy and NCBP)
Thank you!
18