Ninth UNCTAD Debt Management Conference
Geneva, 11 - 13 November 2013
External Shocks, Financial Stability and Debt
by
Mr. Jeffrey D. Lewis
Director
Economic Policy, Debt and Trade
Poverty Reduction and Economic Management (PREM)
World Bank
The views expressed are those of the author and do not necessarily reflect the views of UNCTAD
External Shocks, Financial
Stability and Debt
Implications for borrowing, debt
composition and sustainability
Jeffrey D. Lewis
Director, Economic Policy, Debt and Trade
PREM, The World Bank
Presentation at 9th UNCTAD Debt Management Conference
Geneva, 11-13 November, 2013
http://www.worldbank.org/debt
Contents
• General Outlook
– Global risks and challenges going forward
• Developing Countries’ Vulnerabilities
– Does one size fit all?
• Implications for Debt and Fiscal
Management
– The role of the World Bank and other
Multilaterals
3
GENERAL OUTLOOK
GLOBAL RISKS AND CHALLENGES GOING
FORWARD
4
Gross flows to developing countries
recovered steadily due in part to QE…
Gross capital flows to developing countries
(USD millions, 3m moving average)
60000
Syndicated Bank loans
Bond Issuance
Equity Issuance
50000
40000
30000
20000
10000
0
mars '09
sept. '09
mars '10
sept. '10
Source: World Bank, DataStream.
mars '11
sept. '11
mars '12
sept. '12
mars '13
…but fell sharply again in Jun-Aug on
“tapering” fears
Gross capital flows to developing countries
(US$ billions, 3 month MA)
70
Equities (new issues)
Syndicated bank lending
Bond issuance
60
50
40
30
20
10
0
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Source: Dealogic and World Bank Prospects Group.
6
Jul-13
Developing-country mutual funds
also saw a big decline in inflows
$ billions
40
30
2011
2012
20
10
0
-10
-20
-30
EM Fixed Income Funds
-40
EM Equity Funds
-50
Jan
Apr
Jul
Oct
Jan
Apr
Source: Haver Analytics, EFPRI.
Jul
Oct
Jan
Apr
Jul
Developing country equity markets
dropped with only limited recovery
MSCI Equity Index
Jan 2013 =100
MSCI EM
120
MSCI Developed
115
110
105
100
95
90
85
Jan-13
Source: Bloomberg.
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Concerns over end of QE contributed to of
developing country currency depreciation
Nominal effective exchange rate, April 1, 2013=100
110
105
100
95
90
85
Brazil
Indonesia
Russian Federation
Turkey
China
India
United States
80
janv. '13 févr. '13 mars '13 avr. '13
Source: World Bank, JP Morgan, DataStream.
mai '13
Germany
Malaysia
South Africa
juin '13
juil. '13
août '13
Bottom line: Developing countries
still face an uncertain environment
• Global growth has picked up from the
weakness of mid 2012, but downside risks
remain – the most likely scenario is a slow
and lengthy global recovery
• China’s growth strengthening, along with Brazil
and Turkey, not a generalized phenomena among
develop. countries (i.e., India and Russia lagging)
• Commodity prices will most likely stabilize at
lower levels than the record highs of past
years
Bottom line: Developing countries
still face an uncertain environment
• Global financial conditions better than in
mid-2012, but financial risks rising with end
of the QE era – taper “crunch” a warning?
• Tighter international capital conditions increase the risks in
economies with large CA and/or government deficits
(interestingly also Brazil, India, and Turkey) and in
countries where credit has expanded sharply in recent
years (Indonesia, Malaysia, and Thailand)
• Developing countries fundamentals and
policies stronger than previously, but
borrowing pressures could emerge if
institutional framework is not strong
11
Consideration 1: Commodity exporters at
risk if prices ease more quickly
Commodity Prices are Easing
Prices are falling as supply comes on stream
External Risks Rising:
• Global supply is
responding to a 5fold increase in
resource
investments
• Commodity prices
may continue to
ease.
Consideration 2: Yields starting to rise and
may continue with QE phasing out
600
Spreads over US
Treasuries (bps)
Change since August 2013, basis points
Change since August 2013, percent
500
400
300
200
100
0
Developing Asia
Developing Countries
Latin America & Caribbean
Middle East & N. Africa
External Risks:
• Potential impacts on interest rates, credit
quality and growth from reduction or
withdrawal of quantitative easing
DEVELOPING COUNTRY
VULNERABILITIES
DOES ONE SIZE FIT ALL?
14
Several countries have rapidly rising
gov’t debt that poses additional risks
160
% of GDP
Gross general government debt
Debt in 2012
Change in debt since 2007 (percentage points)
120
80
40
0
Source: Global Economic Prospects June 2013 and IMF
High cost and low maturity of external
debt
External Debt
9.0
Weighted average interest rate (%)
• Several
countries,
primarily in
Caribbean,
Eastern Europe
and Africa, have
relatively short
maturity external
debt with high
interest rates
8.0
Sub-Saharan Africa
7.0
East Asia & Pacific
Europe & Central Asia
6.0
Latin America & Caribbean
5.0
South Asia
4.0
3.0
2.0
1.0
0.0
0
5
10
15
20
25
Average time to maturity (years)
Source: World Bank, data from MTDSs between 2010 and 2013
16
Some countries remain in debt distress
or at high risk of distress
25
Majority of post-HIPC
Completion Point countries at
low or moderate risk of debt
distress
22
20
15
10
5
14
Post-HIPC CP
Benin
Cameroon
Ethiopia
Liberia
Madagascar
Senegal
Tanzania
Uganda
Zambia
Non-HIPC
Bangladesh
Cambodia
Kenya
Myanmar
Vanuatu
Post-HIPC CP
Burkina Faso
Central African Rep
Côte d'Ivoire
Gambia, The
Guinea
Guinea-Bissau
Malawi
Mali
Mauritania
Mozambique
Nicaragua
Niger
Rwanda
Sierra Leone
Togo
Non-HIPC
Kyrgyz Republic
Lao PDR
Lesotho
Nepal
Solomon Islands
South Sudan
Tonga
Many small island states in
moderate and high risk of
debt distress category
15
Post-HIPC CP
Afghanistan
Burundi
Comoros
Congo, DR
Haiti
Sao Tome & Principe
Interim period HIPC
Chad
Non-HIPC
Kiribati
Maldives
Marshall Islands
Micronesia, FS
Samoa
Tajikistan
Tuvalu
Yemen, Rep
0
Low
Moderate
Data as of June 2013
High
3
Pre-HIPC DP
Eritrea
Somalia
Sudan
In debt distress
Some post-HIPC countries’ borrowing
trends are rising rapidly
8 post HIPC countries took 4
years to raise public debt to GDP
1/3 back to pre-relief ratios
65
%
In São Tomé and Príncipe, debt
increased by 30 percent of GDP
60
55
50
These 8 countries are Ghana, Uganda,
Senegal, Niger, Malawi, Benin, São
Tomé and Príncipe, Mozambique
In Senegal and Benin, it grew by
20% of GDP
33p
45
11pp
40
35
In Ghana, Malawi, Mozambique,
Niger and Uganda it rose by 10
percent of GDP
In a decade these countries will
have debt to GDP ratios back at
pre-relief levels as percent of GDP
30
25
2005 2006 2007 2008 2009 2010 2011
Source: Merotto, Stucka and Thomas, 2013
Others on the rise include Ethiopia,
Tanzania, Burkina Faso
18
Domestic debt can be problematic when
interest rates rise
Colombia
Macedonia, FYR
Russian Federation
Samoa
Costa Rica
Serbia
Bangladesh
Honduras
India
Turkey
Bhutan
Mongolia
St. Vincent and the Grenadines
Nepal
Lithuania
Maldives
Bosnia and Herzegovina
Montenegro
Ukraine
Dominica
Belize
Brazil
Cape Verde
Vanuatu
Chile
Morocco
Bulgaria
Jordan
Fiji
Tunisia
Grenada
Latvia
Lebanon
Mauritius
Thailand
Panama
St. Lucia
Vietnam
Malaysia
South Africa
China
Source: World Bank,
International Debt
Statistics.
Private Domestic banking claims (% GDP)
Middle-income countries
Low-income countries
0
20
40
60
80
100
120
140
160
High cost and low maturity of domestic
debt
Domestic Debt
25.0
Weighted average interest rate (%)
• Domestic debt
markets still
underdeveloped,
especially in
African
countries, with
short maturities
and high
interest rates
• Refinancing and
interest rate risk
high
Sub-Saharan Africa
20.0
East Asia & Pacific
Europe & Central Asia
15.0
Latin America & Caribbean
South Asia
10.0
5.0
0.0
0
2
4
6
8
10
12
Average time to maturity (years)
Source: World Bank, data from MTDSs between 2010
and 2013
20
For small Caribbean states, debt and
other problems still remain…
• Caribbean Countries were not eligible for the HIPC/MDRI
debt relief initiatives, and remain burdened by very high
debt levels: plagued by oil shocks, natural disasters, high
interest rates, and low growth rates
• Five Caribbean Countries are assessed in DSAs to be at a
high risk of debt distress or in debt distress: Antigua and
Barbuda, Belize, Grenada, Haiti, and Jamaica
• These are among the most vulnerable countries given their
reliance on remittances and their growth volatility due to
the frequent exposure to hurricanes
IMPLICATIONS FOR DEBT
AND FISCAL MANAGEMENT
THE ROLE OF THE WORLD BANK AND
OTHER MULTILATERALS
22
In this context it is critical to decide:
What to finance: Choose feasible projects
with the highest social return (Public
Investment Management)
How much to finance: Take into account
initial conditions (debt situation), the global
environment (volatility) and the country’s
repayment capacity in the short and medium
term (DSA)
How to finance (choice of instruments): MTDS
cost/risk trade offs; look into macro
implications of alternative debt instruments
It matters how much countries borrow, for
what, and how they borrow (instruments)
Burkina Faso
80.0
80.0
25
70.0
20
60.0
15
40.0
10
30.0
20.0
60.0
15.0
40.0
10.0
30.0
20.0
20.0
5
10.0
0.0
0
5.0
10.0
0.0
0.0
2004 2005 2006 2007 2008 2009 2010 2011
2004 2005 2006 2007 2008 2009 2010 2011
Domestic debt (% of GDP)
Nonconcessional debt (% of GDP)
Concessional debt (% of GDP)
Public capital formation (% of GDP)
Public consumption (% of GDP)
Domestic debt (% of GDP)
Nonconcessional debt (% of GDP)
Concessional debt (% of GDP)
Public capital formation (% of GDP)
Public consumption (% of GDP)
GDP growth 5.7% per year since ‘01
Concessional borrowing drove up debts
Government used it to invest
25.0
70.0
50.0
50.0
•
•
•
Ghana
•
•
•
GDP growth 6.7% per year since ‘02
Non-concessional borrowing drove up debts
Government got smaller in the economy
… because new borrowing is not always
used to finance investment
Niger
80.0
Uganda
20.0
70.0
60.0
15.0
50.0
40.0
10.0
30.0
20.0
5.0
10.0
0.0
0.0
80.0
16.0
70.0
14.0
60.0
12.0
50.0
10.0
40.0
8.0
30.0
6.0
20.0
4.0
10.0
2.0
0.0
0.0
2004 2005 2006 2007 2008 2009 2010 2011
2004 2005 2006 2007 2008 2009 2010 2011
Domestic debt (% of GDP)
Nonconcessional debt (% of GDP)
Concessional debt (% of GDP)
Public capital formation (% of GDP)
Public consumption (% of GDP)
•
•
•
GDP growth 6% per year since ‘01
Concessional and non-concessional;
borrowing drove up debts
Government investment share of GDP fell
Domestic debt (% of GDP)
Nonconcessional debt (% of GDP)
Concessional debt (% of GDP)
Public capital formation (% of GDP)
Public consumption (% of GDP)
•
•
•
GDP growth 6.6% per year since ‘01
Concessional and domestic borrowing
drove up debts
Government capital share of growing GDP
grew – Uganda is investing
Institutional capacity to manage debt is
critically important
Debt sustainability
Debt management
DeMPA
(process)
MTDS (debt
composition)
Long term
debt
sustainability
DSF (debt
level)
Medium-term fiscal framework (MTFF) linkages
with debt strategy (MTDS) & sustainability (DSA)
MTFF
Macro, Revenue &
Spending
Resources available to finance
infrastructure and social spending,
and promote economic development.
Monitor compliance with
rules/targets on spending.
DSA
Financial viability of debt-financed
budget deficits.
Monitor compliance with
rules/targets on debt and borrowing.
MTDS
Identification of adequate debt
instruments to borrow, given their
cost-risk profile.
Absorption constraints imposed by
market developments and investors’
appetite for government debt.
Debt & Budget
Balances
Debt, Borrowing
Requirements,
Financing Options &
Market
Development
Planning,
fiscal policy &
budgetary
departments.
Treasury &
debt
management
departments.
SN finance
division.
What’s next?
• There needs to be a greater focus on fiscal
sustainability and project management
• Countries need to spend better rather
than more
• Sustained growth through better
investment is the only way to ensure debt
sustainability over the long-term.
• Building up capacity is a continuous effort
that the international community need to
support.
External Shocks, Financial
Stability and Debt
Implications for borrowing, debt
composition and sustainability
Jeffrey D. Lewis
Director, Economic Policy, Debt and Trade
PREM, The World Bank
Presentation at 9th UNCTAD Debt Management Conference
Geneva, 11-13 November, 2013
http://www.worldbank.org/debt