Download Living with Debt - Inter-American Development Bank

XXIV Meeting of the Latin
American Network of
Central Banks and Finance
Ministries
Washington, DC
October 20, 2006
1
Outline
•
•
•
•
Data and trends
The international market
The domestic market
Towards safer debt
2
Data and Trends
• Need to focus on total government debt
– Not just external debt
• New, detailed data base constructed
– To be updated and published regularly by SDS/IFM
3
Public debt is not going
away…
Public Debt in Latin America and the Caribbean
80
80
Weighted average
Median
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: Authors' calculations based on Cowan et al. (2006).
Note: Countries included: Argentina, Bahamas, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras,
Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela.
4
Domestic debt is increasing
Composition of Public Debt in Emerging Latin American Countries
70
70
Domestic debt
External due to private creditors
External due to official creditors
60
60
50
50
40
40
30
30
20
20
10
10
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
Source : Authors' calculations based on Cowan et al. (2006).
Note : Countries included: Argentina, Brazil, Chile, Colombia, Ecuador, El Salvador, Mexico, Panama, Peru, Uruguay, and Venezuela.
2000
2001
2002
2003
0
2004
5
Domestic Debt is also growing
in the smaller markets
0.9
0.8
Domestic
External due to Private Creditors
External due to Official Creditors
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Countries Included: Barbados, Belize, Bolivia, Costa Rica, Guatemala, Honduras, Jamaica, Nicaragua, Paraguay.
6
LAC debt levels are not very
high…
Public Debt around the World (weighted averages)
South Asia
M. East & N. Africa
Advanced
Sub-Saharan Africa
L. AM & CAR
2001–2005
1996–2000
Emerging Europe
1991–1995
East Asia
0
10
20
Source: Authors' calculations based on Jaimovich and Panizza (2006).
30
40
50
60
70
80
90
7
… but debt structure
remains dangerous…
Domestic Original Sin in Latin America and Other Emerging Regions
1.0
Index of domestic original sin
0.9
0.8
0.7
0.6
Latin America
Asia
Other emerging markets
0.5
0.4
0.3
0.2
0.1
0.0
1996
1997
1998
1999
2000
2001
2002
2003
Note : Original sin is measured as share of domesic debt which is short term, denominated in foreign currency, or indexed to prices or the interest rate. "Latin America" includes: Argentina, Brazil,
Chile, Colombia, Mexico, and Venezuela. "Asia" includes: China, India, Indonesia (from 1998), Korea, Malaysia, Philippines, and Thailand. "Other emerging markets" includes: Czech Republic,
Israel, Hungary, Poland, Russia, and Turkey.
Source : Authors' calculations based on Jeanne and Guscina (2006) data set.
8
..and debt structure may
matter more than debt level
Standard & Poor's sovereign rating
Public Debt and Sovereign Rating (1995–2005)
AAA
Germany
United Kingdom
Switzerland
France
Austria
Norway
Spain Finland
CanadaDenmark
United
States
Ireland
New Zealand
Australia
Luxembourg
Sweden
Netherlands
?
AA
Iceland
Belgium
Portugal
Italy
Cyprus
Saudi Arabia
Malta
Botswana
Chile
Czech Republic
Korea
EstoniaLatvia
Thailand
China
Oman
?
A
Slovenia
Israel
BahrainBahamas
Malaysia
Poland
Qatar
and Tobago
Africa
Slovak Republic TrinidadSouth
Lithuania
El Salvador
Mexico
Croatia
Colombia
Kazakhstan
Peru Uruguay
Costa Rica
Guatemala
BBB
?
BB
ParaguayUkraine
Turkey
B
Japan
Egypt
Panama
India
Brazil
Russian Federation
Benin
Venezuela
Investment grade line
Barbados
Hungary
Tunisia
Morocco
Philippines
Bulgaria
Senegal
Bolivia
Mongolia
Grenada
Pakistan
Papua New GuineaIndonesia Argentina
Jordan
Ghana
Jamaica
Ecuador
0
10
20
30
40
50
60
70
80
90
100
110
Public debt (percentage of GDP)
Source : Jaimovich and Panizza (2006) and Standard & Poor's.
9
Volatility of Debt ratios
depends on debt structure
Debt-to-GDP Ratio Distribution
0.7
Debt-to-GDP ratio
0.6
0.5
0.4
0.3
0.2
2000
2001
Foreign
currency
2002
2003
2004
Foreign currency
–local currency
2005
2006
2007
2008
2009
Foreign currency–
local currency–linked to GDP
2010
10
The unexplained part of
debt
Decomposition of Debt Growth in LAC7
Percentage of GDP
24
Inflation
Stock flow adjustment
Interest expenditure
Primary balance
GDP growth
12
0
-12
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source : Authors' calculations based on data from Campos, Jaimovich, and Panizza (2006).
11
Outline
•
•
•
•
Data and trends
The international market
The domestic market
Towards safer debt
12
The International Market:
Large but Volatile…
2,000
1,800
Tequila
crisis
1,400
September
11 attacks
1,200
Russian
crisis
1,000
800
600
Brazil elections
and Enron
scandal
400
200
Composite
Apr-06
Apr-05
Apr-04
Apr-03
Apr-02
Apr-01
Apr-00
Apr-99
Apr-98
Apr-97
Apr-96
Apr-95
Apr-94
0
Apr-93
Basis points
1,600
Latin America
13
The International Market:
Large but Volatile…
Extremely low spreads
2,000
1,800
Tequila
crisis
1,400
September
11 attacks
1,200
Russian
crisis
1,000
800
600
Brazil elections
and Enron
scandal
400
200
Composite
Apr-06
Apr-05
Apr-04
Apr-03
Apr-02
Apr-01
Apr-00
Apr-99
Apr-98
Apr-97
Apr-96
Apr-95
Apr-94
0
Apr-93
Basis points
1,600
Latin America
14
Will the good times last?
1400
1200
1000
800
600
400
200
0
1993
1994
1995
1996
1997
1998
1999
Predicted Spreads
2000
2001
2002
2003
2004
2005
Actual Spreads
15
Outline
•
•
•
•
Data and trends
The international market
The domestic market
Towards safer debt
16
Domestic bond markets in LAC
are growing but still small
Percentage of GDP, simple average
140%
120%
Corporate issuers
100%
Financial institutions
80%
Governments
60%
40%
20%
0%
Latin America1994
Latin America 2004
East Asia 1994
East Asia 2004
Advanced 1994
Advanced 2004
17
Institutional Investors can
help…
Assets of Mutual Funds and Pension Funds
(percentage of GDP)
50
45
40
140
Emerging markets (left axis)
Latin America (left axis)
Advanced economies (right axis)
120
100
35
30
80
25
60
20
15
40
10
20
5
0
1997
1998
1999
2000
2001
2002
2003
0
18
The Domestic Markets
• Benefits
– Natural habitat of local currency instruments
– “Spare tire” for the banking system
(Greenspan)
• Risks
– Institutional investors can become victims of
their own success
19
Outline
•
•
•
•
Data and trends
The international market
The domestic market
Towards safer debt
20
Lowering the risks of
sovereign finance
• Domestic policies
• International policies
21
Domestic Policies
• Control the flow of debt
– Strengthen fiscal policies and institutions
• Managing the inherited stock of debt
– Improve debt structure (long-term, local currency and
contingent instruments)
• Even if they are not too costly myopic politicians may not
have the right incentives
– Self insurance (reserves, stabilization funds)
– Develop local markets
22
International Financial
Institutions
• Rollover risk. “Country Insurance” facility.
Support pooling of reserves
• Contagion risk. “Emerging Market Fund”
• Crisis resolution mechanisms (CAC, SDRM)
• Help develop local currency and contingent
debt instruments
– Dedollarize multilateral lending
23
XXIV Meeting of the Latin
American Network of
Central Banks and Finance
Ministries
Washington, DC
October 20, 2006
24
Official borrowing remains
important…
Composition of Public External Debt in Latin American and Caribbean Countries
with Limited Market Access
90
80
70
60
Bank loans
Bonded debt
Other external
Bilateral
Multilaterals
IMF
50
40
30
20
10
0
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source : Authors' calculations based on Cowan et al. (2006).
Note : Countries included: Belize, Bolivia, Costa Rica, Guatemala, Guyana, Honduras, Jamaica, Nicaragua, and Paraguay.
25
…even in countries with
market access
Composition of Public External Debt in Emerging Latin American Countries
45
40
IMF
Multilaterals
Bilateral
Other external
Bonded debt
Bank loans
35
30
25
20
15
10
5
0
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Authors' calculations based on Cowan et al. (2006).
Note: Countries included: Argentina, Brazil, Chile, Colombia, Ecuador, El Salvador, Mexico, Peru, Uruguay, and Venezuela.
26
The unexplained part of
debt
Decomposition of Debt Growth in Different Regions of the World
Percentage of GDP
15
Inflation
GDP growth
0
Primary
balance
Interest
expenditure
Stock flow
adjustment
-15
IND
SAS
Caribbean
Source: Campos, Jaimovich, and Panizza (2006).
EAP
ECA
MNA
LA
SSA
27