Download Sovereign Debt and Development

Sovereign Debt in Developing
Countries with Market Access:
Help or Hindrance?
Indermit Gill and Brian Pinto
The World Bank
“The Financial Sector Post-Crisis:
Challenges and Vulnerabilities”
April 26-27, 2005
Acknowledgements
•We thank Joshua Aizenman, Amar Bhattacharya, Nina
Budina, Craig Burnside, Christophe Chamley, Ajay Chhibber,
Gautam Datta, Norbert Fiess, Jim Hanson, Olivier Jeanne,
Himmat Kalsi, Homi Kharas, Gobind Nankani, Vikram
Nehru, Anand Rajaram, Luis Serven, John Williamson,
Holger Wolf, and many others for useful comments or
contributions. All errors are ours.
The opinions expressed in this paper are entirely those of
the authors and should not be attributed to the World
Bank, its Executive Directors, or the countries the
represent.
In Principle:
• Government borrowing should facilitate
growth by permitting investments in
infrastructure and social sectors
– Debt often superior to taxing money or output
• Free capital flows should augment resources
in developing countries and accelerate
growth and convergence.
In Practice:
•1980s: widespread external debt crisis, took a
decade to resolve
•Early 1990s
– Brady Plan -18 countries, restructured $200 billion of
bank loans into $154 billion in bonds
– Financial liberalization
•After mid-1990s:
– Another round of crises
– Two new generations of crisis models
Things haven’t gone too well with sovereign debt and
capital account openness.
Objective- Answer three
questions:
• What are the chances of another 1980s-type
debt crisis?
• Is public debt constraining growth?
• What is being done about sovereign debt?
Focus: Market Access Countries
Table 1. Sovereign Debt -Ten Big MACs and
Ten Debt Majors
India
China
Brazil
México
Korea
Turkey
Indonesia
Russia
Argentina
Poland
Total Public Debt ($ Billions)
1992
2002
156
380
68
366
165
284
118
280
61
232
65
173
56
149
12
118
59
117
44
72
Lebanon
Argentina
Uruguay
Jordan
Turkey
India
Pakistan
Morocco
Philippines
Indonesia
Notes: Public and publicly guaranteed external debt and domestic public debt.
Public Debt to GDP (%)
1992
2002
70
177
26
126
48
109
167
100
40
94
74
81
81
90
102
90
81
89
40
86
Approach
•Survey the literature to develop a conceptual framework
– Growth theory
– External capital flows
– Macroeconomic crises
There’s not much theory linking sovereign debt and growth.
Empirical studies are few and fraught with measurement and
econometric problems.
•Answer the three questions.
Debt issues are very country-specific, difficult to generalize.
Findings from the Literature
Survey
• MACs do not appear to have used sovereign
debt well.
• External capital flows are more likely to
have enhanced vulnerability than growth
Why Such Negative Findings?
• Debt intolerance vs. Original Sin
• Paucity of suitable instruments
• Fiscal Space – IFI macro framework is
wrong
• Political economy explanations more
convincing than pure economic theory,
which rules out crises by construction.
Table 3. Main Factors Underlying Debt
Reduction, 1990-2003
Country, Time Period
Initial level
% of GDP
Total Change
% of GDP
Main Contributing Factors (% of GDP)
GDP Growth Primary Balance Exchange Rate
Chile, 1990-1998
Indonesia, 2001-2003
Lebanon, 1990-1993
Malaysia, 1990-1996
Mexico, 1990-1993
Pakistan, 2001-2003
Philippines, 1993-1997
Poland, 1992-2000
Russia, 1999-2003
Turkey, 2001-2003
42.7
90.3
98.4
91.4
50.2
113.5
93.5
86.7
88.7
95.0
-30.2
-22.3
-48.5
-41.4
-22.8
-18.3
-25.3
-42.8
-55.2
-21.3
-15.6
-9.5
-33.4
-37.3
-3.9
-10.2
-15.1
-25.5
-15.4
-11.3
-11.5
-8.3
15.8
-32.3
-12.9
-6.0
-22.4
-16.7
-10.2
-5.9
-6.2
-7.5
-9.0
-19.3
-8.2
Unweighted Average
85.0
-32.8
-17.7
-10.5
-6.1
Based on Budina, Fiess and others (2004)
-4.8
Debt Reduction Episodes
• All episodes involve GDP growth as one of
the main contributing factors.
• Two-thirds involve significant primary
surpluses; in only one episode, Lebanon
1991-93, were debt ratios reduced while
running a primary deficit.
• Two-thirds of the episodes involve real
exchange rate appreciation.
Table 4. Main Factors Underlying Debt
Increases, 1990-2003
Country, Time Period
Argentina, 2000-2003
Brazil, 1998-2003
India, 1997-2003
Indonesia, 1997-2000
Jamaica, 1997-2003
Korea, 1996-1998
Lebanon, 1994-2003
Malaysia, 1997-2001
Mexico, 1994-1998
Pakistan, 1995-2001
Philippines, 1998-2002
Russia, 1997-1999
Turkey, 1998-2001
Unweighted Average
Terminal Level Total Change
Main Contributing Factors (% of GDP)
% of GDP
% of GDP Primary Balance Interest Rate Exchange Rate Other Factors
146.1
95.3
5.5
41.7
53.0
58.7
16.5
-18.5
23.7
11.0
-7.5
87.0
21.8
20.0
20.0
94.6
70.8
8.2
64.4
152.7
74.8
-56.4
51.6
78.6
43.5
31.0
4.3
4.8
20.6
177.9
128.1
39.4
115.5
70.6
19.9
-32.0
17.2
26.2
56.6
29.3
-23.9
23.3
5.9
26.6
87.6
27.9
-4.5
20.6
20.2
8.5
89.1
20.9
-5.2
10.3
12.1
15.9
88.7
34.0
40.4
-4.1
95.1
51.3
-5.3
32.5
7.7
7.9
96.0
47.8
Based on Budina, Fiess and others (2004)
-6.3
24.6
11.7
22.3
Debt Increase Episodes
• All episodes involve real interest or exchange rate
changes or both as significant factors
• Most episodes involve "other factors" such as
financial sector bailouts
• In more than half the cases, the countries ran
primary surpluses during these debt run-ups; only
in three cases did countries run primary deficits.
• Economic growth collapses did not play an
important part
Public Debt and Economic Growth
(1)
g  g ( , FD)
( )
( )
g

- GDP growth
- Inflation
FD - fiscal deficit
(2)
g  f ( g )
g
Output volatility
( )
(3)
g   g  ,crisis  g  ,normal
(4)
d  d ( g , SR( g  )),
*
()
( )
d * - optimal debt
SR - sovereign (or default) risk
Sustainability and Solvency
• “Sustainability” problem means mix of
primary fiscal balances, real interest rates
and growth rates is untenable.
– Market final arbiter of sustainable debt level for
MACs.
• “Solvency” problem means discounted sum
of future primary fiscal surpluses less than
initial debt.
– Insolvency implies unsustainability.
Let’s Get Real!
• No objective measure of sustainability.
– Example: primary deficits and r>g but low debt-toGDP; or temporary.
• On the other hand:
– government may be unhappy -- too much revenue
going for interest, short maturities
– market may be signaling high default and devaluation
risk.
• “Unsustainable debt dynamics” inextricably tied
up with market perceptions and political economy.
Possible Responses to
Unsustainability
•
•
•
•
Procrastinate (Russia, Argentina)
Inflate away debt (Russia, Argentina)
Default and restructure (Russia, Argentina)
Increase primary surplus, move to flexible
exchange rates, reform fiscal and other
institutions (E. Asia, Brazil, Turkey).
Chances of Another Big Crisis
• Never say never. But crisis risks have
receded since late 1990s.
– Low international interest rates, encouraging
movements in market spreads
– Moral hazard likely to be lower after Russia
Argentina
– Significant countries running large primary
fiscal surpluses, flex exchange rates, move
towards domestic debt.
Table 6. Economic Indicators Before and
After Crisis in Four Big MACs
Argentina
Brazil
Russia
Turkey
Primary Surplus
% of GDP
before
after
0.1
0.8
0.5
3.8
-3.2
4.6
0.1
5.2
Interest Payment
% of GDP
before
after
3.4
7.3
7.0
8.1
5.0
3.8
18.7
19.8
Net Resource Transfers
US$ bln
before
after
7.0
-8.1
19.4
4.7
6.3
-3.6
2.8
-0.4
Real Exchange Rate
1st year = 100
before
after
97.5
57.5
89.2
54.8
111.0
72.4
98.1
84.9
Notes: 1. Real exchange rate is bilateral with respect to US$, period average
2. Argentina: before 1998-2000, after 2001-2003; Brazil: before 1996-1999, after 2000-2003;
Russia: before 1995-1998, after 1999-2002; Turkey: GNP is used, instead; before 1998-2000, after 2001-2003.
3. Net resource transfers are calculated as a net resource flows minus interest on long-term debtand profit remittances on FDI
Data are not available for 2003
Source: Staff estimates, Global Development Finance, various issues
Growth Being Constrained?
• Easy answer: yes, based on debt thresholds
established by existing studies
• Yes, if debt sustainability problems
(Argentina, Brazil, Jamaica, Lebanon,
Turkey)
• Yes, if debt intolerant and volatile.
• Yes, if leads to an adverse spending
composition (India)
What is Being Done?
• Numerous initiatives, little concrete
progress
– SDRM on hold, CACs appear to be taking off
– Chance of new instruments remote
• Most significant: what countries themselves
are doing.
Some Conclusions
• MACs need to pay more attention to the
government’s inter-temporal budget constraint
(different mindset)
• If debt sustainability problems, negative impact on
growth very likely (don’t assume you’ll grow out
of the debt problem)
• Fiscal space a valid point, but approach cautiously
• Fiscal and institutional reform key
• Vexing problem: How can IFIs help MACs?
Thank you!