Quarterly Bulletin: Sixth Edition
Spotlight on External Debt and Public Debt Data
When the global economy is buoyant, international commodity prices robust and market conditions benign, scant attention is paid to public and external borrowing by low- and middle-income countries and the data that tracks borrowing trends and volumes. But, when debt crises occur inadequate or incomplete data are typically cited as an important part of the problem, often giving rise to new data collection systems. The Quarterly External Debt System (QEDS)was implemented in the wake of the Asian Crisis to respond to demands for high-frequency data. The launch of the Quarterly Public Sector Data (QPSD) in 2010 was part of a global effort to fill key financial data gaps that impeded policy response to the 2008 financial crisis. Current concerns over external and public debt sustainability in low-income countries, including many that benefited from large-scale HIPC and MDRI debt relief, have put the spotlight on measuring contingent liabilities, collateralized debt and transparency. Before taxing national debt offices with additional demands, a stock-taking of the timeliness and quality of the external debt and public debt data currently available is in order.
Public and Publicly Guaranteed Debt
The ‘grande dame’ of external debt statistics is the World Bank Debtor Reporting System (DRS), instituted in the 1950s. A condition of borrowing from IBRD and IDA is submission by the borrower of a detailed account of its external public and publicly guaranteed obligations to the DRS: specifically, loan-by-loan commitment data on a quarterly basis and stock and flow transactions for each loan, annually. The DRS methodology mirrors that of the balance-of-payments: external debt is any debt-related transaction between a resident and a non-resident, regardless of the currency in which it takes place. The DRS defines ‘external public and publicly guaranteed debt’ as obligations of the sovereign, state and local governments, public and private enterprises with an explicit guarantee by the sovereign and the debt of state-owned enterprises where the sovereign owns 50 percent or more. Due to its longevity the DRS has a comprehensive, long-dated time series of cross-country comparable external debt data for over 125 low- and middle-income countries. The loan-by-loan structure allows for flexibility of data extracts and aggregations for cross-referencing with creditor information and analytical applications.
The past decade has seen a significant improvement in debt management in low- and middle-income countries with several factors at play. These include the conditions imposed by IMF programs, the demands of credit rating agencies, the rigors of debt workout scenarios and debtor-creditor data reconciliation, and advances in debt management software and its wider application. For low-income countries, a key element is capacity building through the Debt Management Facility (DMF), set up by the Bank and international partners in 2008 to address the international community’s concerns regarding the adverse impact of passive or inadequate debt management practices. Since inception debt management practices in over eighty countries have been assessed, with one third having a second, follow-up assessment. Debt recording and operational risk management is a dimension of debt management identified as one where important strides have been made. This finding is mirrored in the improvement in DRS reports, now assessed as fully satisfactory in terms of comprehensiveness, data quality and adherence to the specified timetable for reporting for 75 percent of countries. Similarly reporting to QEDS, encouraged but voluntary, has expanded to over 80 percent of low- and middle-income countries.
External Private Sector Non-Guaranteed Debt
In addition to external public and publicly guaranteed debt, external borrowing by private sector entities, without the guarantee of the government, is also captured in the DRS: it requires an annual aggregate report on this category of debt from all countries where such borrowing is significant. The majority of DRS reporters comply but a significant gap remains in respect of low-income countries who do not collate this information or do not make it public but where data from market sources, and reports in international and national press, indicate it is an important share of external debt. Private non-guaranteed borrowing of the private sector is not a contingent liability of the government and theoretically, companies not financially viable are allow to fail. But, history shows that large-scale companies and those central to the economy are frequently seen as ‘too big to fail’ and bailed-out or taken over by the government. Thus, governments need to be cognizant of the extent of the external obligations of its private sector. The Bank’s Development Data Group, which oversees and manages the DRS, is taking steps to ameliorate the coverage of external private non-guaranteed debt through direct communication with central banks, usually the institution charged with monitoring private sector borrowing, to familiarize them with the DRS and solicit participation. In parallel it is seeking support, and information sharing, from creditors that lend extensively to private sector borrowers without a sovereign guarantee.
Public Sector Debt
The depth and breadth of domestic debt markets in low- and middle-income countries has grown exponentially since the start of the Millennium but this development has not been accompanied by a corresponding expansion in the compilation and dissemination of data on public sector debt. In contrast to external public debt, there is no mandatory reporting to an international body for the domestic counterpart. Reporting to the QPSD is voluntary and to date only a limited number of low- and middle-income countries, mostly the more advanced market borrowers, participate.
Quarterly Public Debt is reported in aggregate form, not loan-by-loan. Counter to intuition, reporting aggregates is more difficult than reporting the raw data for contractual debt obligation. Countries must categorize instruments into the relevant classification schemes, and value the debt in a manner consistent with Public Sector Debt Guide and Government Finance Statistics standards. Only a small number of low income countries regularly report into the system and those that do so typically provide information on the narrowest definition of public debt – loans and securities of the central government. Most countries have only limited capacity to measure and classify public sector debt in a manner consistent with the standards set out in the Public-Sector Debt Guide and Manual on Government Finance Statistics.
Data on domestic public debt used for in the analysis of the risk of debt distress and presented in the joint Bank/Fund DSAs is a mix of information provided by national authorities and staff estimates. The definition and scope of what constitutes domestic public debt varies from one country to the next and thus does not allow for robust cross-country comparison. Consequently, there is currently no database that provides timely, consistent and cross-country comparable data on the domestic component of public debt. This is a serious omission given the increased emphasis on public, as well as external, debt in debt sustainability analysis and particularly so for countries with elevated, and potentially unsustainable, levels of public debt. Detailed information on the form and composition of domestic debt is essential to the formulation of restructuring options and assessment of the implications for the domestic financial sector and the broader economy.
External Debt Trends in 2017
I. Trends in Low- and Middle-Income Countries
In 2017, low- and middle-income countries reporting to QEDS recorded an 11 percent increase in external debt stocks from the end 2016 level. Driving the trend were the top ten borrowers, who together accounted for 73 percent of the reported external debt stock. On average these borrowers recorded a rise in external debt of 12.5 percent in 2017, almost twice the rate of external debt accumulation of other low- and middle-income countries reporting to QEDS. Borrowing patterns across the major borrowers were divergent. Brazil was the only country where external debt contracted marginally in 2017 (by 1 percent) while Russia and Mexico posted moderate increases, 5 percent and 6 percent respectively. In contrast, new external borrowing by China surged, pushing external debt stock at end 2017 up 21 percent over the comparable figure for 2016. South Africa also saw external debt stock rise 21 percent in 2017, with much of this rand denominated debt held by non-residents. Argentina posted the largest increase among the top-ten borrowers, 28 percent, with external borrowing by both public and private, non-guaranteed, sector borrowers up sharply.
Figure 1: Low- and Middle-Income Countries Reporting to QEDS: Percentage Change in External Debt Stock December 2016 to December 2017
The external debt stock of all low- and middle-income countries was an estimated $7.6 trillion at end 2017, based on data reported to QEDS and information from creditor sources, both official and private. This marked a sharp upward trajectory from the moderate, 4.1 percent rise in comparable debt stock in 2016 and the contraction in external debt recorded in 2015. Long-term borrowing by both public and private sector borrowers drove the 2017 increase. In contrast, short-term debt stock was static, ending the year at much the same level as 2016. All regions registered an increase in external debt in 2017 but the aggregate figure masks wide divergence at the individual country and regional level. The East Asia and Pacific and Sub-Saharan Africa regions recorded the faster accumulation; a 17 percent rise in external debt stock in 2017. The increases were spurred by outcomes in China and South Africa but, in Sub-Saharan Africa, also by the rapid, in some instances as much as 30 percent rise, in external debt stock of other countries in the region, for example Cameroon and Cote d’Ivoire. Latin America and the Caribbean posted the smallest, less than 5 percent, rise in external debt stock in 2017, with the contraction in Brazil and moderate rise in debt stocks of Mexico and other major borrowers in the region offsetting Argentina’s rapid pace of external accumulation.
Figure 2: Change in External Debt Stock by Region 2015-2017
Bond issuance by low- and middle-income countries surged to a record level in 2017 and constitute a key element of net debt inflows and rising external debt stocks. Data compiled by Dealogic, from creditor and other market-based sources, show bond issuance by low- and middle-income countries totaled around $401 billion in 2017. This was a 67 increase over the comparable figure for 2016 and a set a record high. The fastest growing component was bond issuance by private sector entities which doubled in 2017 to $159 billion, as compared to a 50 percent rise in new bond issues by sovereigns and other public sector borrowers.
Figure 3: Low- and Middle-Income Countries International Bond Issuance 2008-2017
Borrowers in the East Asia and Pacific region, especially China, recorded the most significant increase in bond issuance in 2017: up more than threefold to $191 billion, equivalent to close to half of the 2017 issuance by all low- and middle-income countries combined. Latin America and Caribbean was the only region to record a decline in bond issuance in 2017 but this has to be set against the spike in 2016 issuance resulting from Argentina’s re-entry to bond markets and restructuring operation. Excluding Argentina bond issuance by other countries in the region was up 33 percent in 2017. Issuances by countries in Europe and Central Asia rose 40 percent led by sovereign and corporate issues by Russia, Turkey and the Ukraine. The moderate, 12 percent, share of 2017 low- and middle-income bond issuance accounted for by the Middle East and North Africa, South Asia and Sub-Saharan Africa regions combined, masks the sharp, on average 125 percent, rise in 2017 bond issuance by countries in these regions, including Egypt, India, Cote d’Ivoire and South Africa.
Figure 4: Bond Issuance by Low- and Middle-Income Countries 2015-2017
Bond Issuance by Low-income Countries Mirrored the Rising Trend in other Low- and Middle-Income Countries. The world’s poorest countries, defined as those classified by the World Bank as IDA-only, remain heavily depen¬dent on official, concessional, sources of financing, but Ghana’s sovereign Eurobond issued in 2007 marked the entry to international capital markets. Since then 11 other low-income countries have gained market access and thereby become exposed to volatile market sentiment, increased debt servicing costs if interest rates rise and rollover risk. Despite this bond issuance continued apace reaching its highest level to date in 2017, $4.9 billion, including debut issues by Maldives and Tajikistan. This brings low income countries total international bond issuance (by sovereigns and public- sector entities) to $21 billion since 2007. Proceeds from these issuances have been used for infrastructure financing, balance of payments support, and refinancing. Bonds and other private sources of financing, account for an increasingly important share of public and publicly guaranteed debt: on average an estimated 20 percent of low income countries combined external debt stock at end 2017. In the countries that have been most active in the bond markets such as Ghana, Cote d’Ivoire the share of owed to private creditor is far higher, hovering around 50 percent of total external public debt stock at end 2017.
Figure 5: Bond Issuance by Sovereigns and Public Entities in Low income Countries 2007-2017
II. Trends in High-Income Countries
External debt levels in high-income countries reporting to QEDS reached a record high in 2017. The gross external debt stock stood at $74.8 trillion at end 2017, up 10.3 percent over the comparable figure at end 2016. This rise was a stark contrast to the two previous years (2015-2016) when external debt levels remained static at around $67 trillion. Short term external debt liabilities rose faster than the long-term debt counterpart in 2017, by 12 percent to $28.9 trillion, while long term external debt liabilities rose 9 percent to $45.9 trillion. The composition of gross external debt stock was unchanged with long-term debt accounting for 60 percent and short-term liabilities 40 percent. Except for four countries (Antigua and Barbuda, Iceland, Seychelles, and Uruguay) all other thirty-nine high-income countries reporting to QEDS recorded a rise in gross external debt stock in 2017. In nineteen countries this increase was below 10 percent, in seventeen countries it was above 11 percent and in three countries (The Bahamas, Czech Republic and Slovak Republic) it surpassed 30 percent.
Figure 6: High Income Countries – Gross External Debt Stock 2010-2017
The combined external debt of the Group of Seven (G7) countries rose 10 percent to $47 trillion at end 2017. The group accounted for 63 percent of the total external debt of high-income countries. In Canada, France, Germany, Italy and United Kingdom nominal external debt stock in 2017 rose on average by $0.6 trillion, equivalent to an increase of between 11 percent (Canada) and 17 percent (Italy). For the remaining two countries in the group, Japan and the United States, the increase in external debt stock in 2017 was moderate, a little over 5 percent.<\
Table 1: G-7 Countries – Change in External Debt Stock 2016-2017
The 2017 increase in external debt stock of high-income countries took place across all sectors. The most significant increase, in dollar terms, was recorded by deposit-taking corporations (excluding central banks), comprising primarily commercial banks where external debt rose $2.1 trillion to $23.3 trillion, equivalent to an increase of 10 percent. The most significant increase, in percentage terms, was external borrowing by central banks, up almost 28 percent from the 2016 level.
Table 2: Composition of High-Income Countries External Debt Stock 2016-2017 – Level and Percentage Change