Quarterly Bulletin: Fifth Edition
International Debt Statistics (IDS) 2018 was published two months ahead of prior editions to respond to user demands for access to comprehensive data on trends in external debt of low- and middle-income countries at the earliest possible opportunity. To complement the streamlined overview presented in IDS 2018 a series of online bulletins, of which this is the first, published throughout the coming year, will present detailed analyses of trends in debt stocks and flows of low- and middle-income countries. The primary sources for these analyses will be the data on external debt stocks and debt-related transactions (gross disbursements, principal and interest payments) for low- and middle-income countries captured through the World Bank’s Debtor Reporting System (DRS), but they will also draw from the high-frequency, quarterly external and public debt statistics captured through the Quarterly External Debt Statistics (QEDS) and quarterly Public Debt Statistics (PSDS) databases. QEDS and PSDS both include data for high-income countries as well as for low- and middle-income countries.
Financial Flows to Low- and Middle-Income Countries rise in 2016
Net financial flows to low- and middle-income countries rose threefold in 2016 to $773 billion driven by renewed net debt inflows (loan disbursements minus principal repayments), which climbed to $248 billion, a marked turnaround from the $294 billion contraction recorded in 2015.
In contrast, net equity inflows declined by 6 percent reflecting the first downturn in FDI in 7 years. Net equity inflows remained the largest component of net financial flows in 2016 in all regions except Middle East and North Africa and Sub-Saharan Africa.
Figure 1: Net Financial Flows 2016 - Regional Shares
Regional Trends in Debt Inflows to Low- and Middle-Income Countries 2016
The rebound in net debt inflows (loan disbursements minus principal payments) to low- and middle- income countries in 2016 was driven by a resurgence in both long-term and short-term debt inflows. The former rose 37 percent to $264 billion while the turnaround in short-term debt flows was significant. They climbed $472 billion to end the year marginally negative, -$15 billion, a marked contrast to the outflow of $487 billion recorded in 2015. The East Asia and Pacific, Europe and Central Asia and Latin America and the Caribbean regions combined commanded the lion’s share, 83 percent, of net debt inflows in 2016 with South Asia the only region to register a net debt outflow (-$7.7 billion).
Figure 2: Net Debt Inflows – Regional Distribution, 2016
Trends in net debt inflows over the period 2014-2016 were volatile with relatively few countries benefitted for the increase in net debt inflows in 2016. Much of the volatility, and outcomes, was driven by trends in the top-ten major borrowers. For other low- and middle-income countries the level of net debt inflows was virtually unchanged at $100 billion per annum.
Figure 3: Net Debt Inflows – Top-10 and Other Low- and Middle-Income Countries, 2014-2016
Debt inflows for the top-10 borrowers rose by $544 billion in 2016 to $150 billion, a stark contrast to the net outflow of -$394 billion registered in 2015. The major beneficiaries of these inflows were China and Russia while the remaining top-10 borrowers recorded declines, or slight increases, in net debt inflows in 2016. The story for countries other than the top ten borrowers was mixed. Countries in the Middle East and North Africa saw net debt inflows rise 80 percent and the comparable flows to the South Asia region rose 9 percent. In contrast, net debt inflows to Sub-Saharan Africa fell 20 percent and those to the countries in East Asia and Pacific were down by 45 percent. Net debt flows to Europe and Central Asia remained negative but were up 68 percent from their 2015 level.
Figure 4: Trend in Net Debt Inflows by Region excluding Top-Ten Borrowers, 2014-2016
East Asia and Pacific: Net flows turn positive
The East Asia and Pacific region saw a significant turnaround in debt flows in 2016 to an inflow of $91 billion, from the outflow of $ 353 billion recorded in 2015. The dominant factor was developments in China, where net debt inflows climbed to $54 billion (-$393 billion in 2015); equivalent to 60 percent of net debt inflows to the region in 2016.
Excluding China, more than two thirds of the $37 billion in net debt inflows to other East Asia and Pacific countries was short-term financing. Disbursements of long-term financing to non-guaranteed private sector borrowers remained strong at $78 billion. The majority of these inflows took the form of commercial bank loans or inter-company lending associated with foreign direct investments and were highly concentrated with three countries, Indonesia, the Philippines and Thailand accounting for 83 percent. However, there was a parallel rise in principal repayments with the result that long-term debt inflows to private sector borrowers contracted sharply. In contrast, the 27 percent decline in disbursements to public and publicly guaranteed borrowers was accompanied by lower principal repayments. Overall however, net long-term debt inflows to the region, excluding China, were down almost 60 percent from the 2015 level to $24 billion.
Figure 5: Long-Term Disbursements and Repayments excluding China, 2015-2016
Europe and Central Asia: 2015 large-scale outflows reverse course
Net debt inflows to the region rose to $53 billion in 2016, a stark contrast to the outflow of $102 billion recorded in 2015. The resurgence was driven by a turnaround in both long-term and short-term debt flows and by private creditors which accounted for 90 percent of 2016 net debt inflows. But these inflows were heavily concentrated in Russia and Turkey which together accounted for 94 percent and most borrowers in the region continuing to experience net debt outflows albeit at more moderate levels than in 2015.
The region depends primarily on private sector creditors which accounted for over 90 percent of long term debt inflows in 2016. New bond issuance by public sector borrowers in Russia totaled $11 billion in 2016 of which all but $1 billion was issued in domestic currency and sold to non-residents eager to capitalize on the ruble appreciation. Public sector issuers in Turkey were also active, raising $7 billion in 2016 (up from $5.2 billion in 2015). Borrowing by private non-guaranteed corporates rebounded strongly in 2016, rising $75 billion to a net inflow of $51 billion. But, this was driven almost entirely by commercial bank flows to Russian entities and inter-company lending associated with renewed foreign direct investment in response to the recovery in international oil prices and concomitant strengthening of prospects for the Russian economy.
Figure 6: Long Term Debt Disbursements and Net Debt Flows, 2016
Latin America and Caribbean: flows continue their downward slide
In 2016 net inflows to the region continued their downward trajectory, falling 25 percent to $51 billion, less than one third the level recorded in 2014. But for Argentina’s highly successful return to the bond markets after a fifteen-year absence (see Box 1), net debt flows would have fallen 75 percent in 2016 from their 2015 level. The downturn was driven by a sharp contraction in new borrowing by private sector corporates in the region’s largest economies, Brazil and Mexico which contracted from inflows of $27 billion in 2015 to a marginal ($0.4 billion) outflow in 2016. Net inflows to public sector borrowers, other than those in Argentina, declined 16 percent, to $28 billion with Mexico and Colombia accounting for 45 percent and 15 percent, respectively.
Figure 7: Long Term Debt Flows - Borrower Composition, 2016
Middle East North Africa: rise in net debt inflows
The region saw a far larger increase in net debt inflows than any other region in 2016. They rose to $27.6 billion, an 80 percent increase over the comparable figure for 2015 level, driven by a jump in short-term debt inflows to $10.8 billion directed largely at Egypt ($7.5 billion) and, to a lesser extent, Morocco ($2 billion). The 11 percent rise in net long-term debt flows masked a marked shift in their composition with a near 50 percent rise in net inflows from official creditors. (both bilateral and multilateral), offsetting a downturn in bond issuance across the region and a net outflow of funds from public sector borrowers to commercial banks and other private creditors.
Egypt drove the regional trend in 2016 with the authorities’ commitment to structural reforms to revive growth and employment, backed by an IMF $12 billion Extended Fund Facility (EFF)approved in November 2016, receiving strong approval from the business community, international development partners and foreign investors. Liberalization of the foreign exchange (FX) market eliminated the parallel market and underpinned the rise in short-term debt inflows while long-term debt inflows rose almost 80 percent. New disbursements from official creditors jumped to $16 billion, including $2.7 billion from the IMF EFF, bolstering international reserves which rose to 31 percent of outstanding external debt stocks at end 2016 (27 percent at end 2015).
Figure 8: Egypt Trends in External Debt and International Reserves
South Asia: the first net debt outflow in fifteen years
For the first time in fifteen years the South Asia region recorded a net debt outflow ($7.7 billion) in 2016 driven entirely by a $24 billion long-term debt outflow from India. On the side of public and publicly guaranteed debt the Reserve Bank of India’s efforts at demonetization and downward shift in exchange rate valuations of the rupee had an adverse effect on foreign investors’ appetite for debt securities and deposits into domestic currency accounts (NRIs) by nonresident Indian nationals. Together, these factors resulted in a net outflow of $8.4 billion. Private sector borrowers, not benefitting from any government guarantee, reduced new borrowing from commercial banks by one third despite an acceleration in principal payments, leading to net debt outflows of $15.6 billion. For other important borrowers in the region trends in net debt inflows in 2016 were disparate. They increased 25 percent In Pakistan to $7.6 billion and rose 18 percent in Sri Lanka to $2.6 billion. Conversely, net debt inflows to Bangladesh fell 26 percent in 2016.
With the exception of India, countries in South Asia continue to rely heavily on official sources of financing. These constituted on average almost 60 percent of long-term disbursements in 2014-2016, with multilateral creditors accounting for the largest share, close to 40 percent. Going forward, inflows from bilateral creditors are likely to accelerate as a result of the rapid rise in large-scale infrastructure commitments from the BRICs.
Figure 9: Creditor Composition of Debt Flows to South Asia (excluding India), 2014-2016
Sub-Saharan Africa: debt stocks continue to climb
The combined external debt stock of countries in the region continued on an upward trajectory in 2016, rising by a further 7.4 percent and bring the average increase since 2010 to 60 percent. The aggregate figure masks wide divergence in the pace of external debt accumulation at the individual country level, with some countries in Sub-Saharan Africa recording the fastest rise in external debt levels of any low- and middle-income country. For example, between 2010-2016 the external debt stock of Ethiopia rose by over 200 percent and in others such as Ghana, Kenya, Liberia and Zambia it increased by more than 100 percent. In several countries, rapid increases in outstanding external debt is attributable to large bond issuance in international capital markets.
The pace of debt accumulation was not mirrored in a comparable rise in gross national incomes which have been impacted by weakening in international prices for oil and mineral commodities, devaluation of national currencies, and uncertain prospects surrounding the global economy. The GNI for Sub-Saharan Africa, measured in US dollars, rose at a much slower pace that external debt between 2010-2016, on average 13 percent, raising renewed concerns of debt sustainability and putting some Sub-Saharan African countries at high risk of debt distress.
Figure 10: Change in External Debt Stock and GNI for Select African Countries, 2010-2016
Lending by Official and Private Creditors diverge
The creditor composition of net debt inflows varied considerably across the regions. In Sub-Saharan Africa, official creditors accounted for 74 percent of net long-term debt inflows in 2016, two thirds of which came from bilateral creditors. In the Middle East and North Africa region the comparable share for official creditors was 93 percent, divided broadly evenly between bilateral and multilateral creditors. In other regions, net inflows from official creditors were negligible, ranging from 3 percent in East Asia and Pacific to 10 percent in Europe and Central Asia.
Private Creditors – Spotlight on Bond Issuance
In the recent years, bond issuance by public and private entities has been the mainstay of external financing for many low- and middle-income countries – averaging 45 percent of net long-term debt inflows in 2012-2015. In 2016 net inflows from bond issuance continued on an upward trajectory, rising 40 percent to $118 billion but the outcome was heavily influenced by developments in two countries, Argentina and Russia where inflows on bonds surged to $54 billion, equivalent to 46 percent of total inflows to all low- and middle-income countries in 2016. When Argentina and Russia are excluded other low- and middle-income countries saw the net inflows from bonds fall 32 percent in 2016 with all regions except Europe and Central Asia registering a decline.
Figure 11: Net Inflow on Bond Issuance by Public and Private Entities, 2008-2016
Box 1: Argentina Bond Issuance and Restructuring 2016
Argentina returned to international bond markets in 2016 with its first sovereign issue since its record default. Its record $16.5 billion bond sale in April 2016, which was four times oversubscribed, was the largest in emerging market history. Most of the proceeds went to settle Argentina’s legal dispute with investors and overdue payments on previously un-restructured debt and arrears on debt restructured under Argentina’s 2005 and 2010 debt exchange. In addition to the $16.5 billion debt restructuring operation, public and publicly sector borrowers in Argentina issued bonds to the value of $21.4 billion in 2016.
In their 2016 submission to the World Bank Debtor Reporting System (DRS) the Argentine authorities indicated payment of $2.2 billion in overdue principal and $9.9 billion in overdue interest was made in 2016. Transactions associated with this bond issuance and restructuring are reflected in the online tables as indicated below. An alternative approach to recording is to capitalize overdue interest into the stock of outstanding principal in which case net flow would be revised downwards to $25.8 billion.
Official Creditors – Spotlight on Bilateral Loans from Non-Traditional Sources
New loan commitments by bilateral creditors rose 115 percent in 2016 to $84 billion. The fastest growing element of this surge in bilateral lending were loans to low- and middle-income countries from the BRICs, and notably China, in the context of the ‘One Belt One Road’ initiative, launched in 2013. They tripled to $55 billion, equivalent to two thirds of all bilateral loan commitments in 2016. Countries in South Asia and Sub-Saharan Africa were the principal beneficiaries of this lending, accounting for 38 percent and 37 percent, respectively of 2016 commitments by BRICs. At the individual country level in each region the principal recipients were Angola, Bangladesh, Belarus, Ecuador, Egypt, Kazakhstan and the Republic of Lao.
Figure 12: Loan Commitment 2016 from BRICs to Low- and Middle-Income Countries
Debt Burdens in Low- and Middle-Income Countries are on an upward trajectory
The external debt burden of low- and middle-income countries, measured in relation to Gross National Income (GNI), averaged a moderate 26 percent at end 2016, only marginally above the prior year average of 25 percent. But, these ratios, calculated using the current, end-2016 U.S. dollar value of GNI mask both increased debt burdens resulting from appreciation of the U.S. dollar and the upward trajectory of external debt in relation to GNI and other macro-economic indicators in an increasing number of low- and middle-income countries.
The average ratios are heavily influenced by China the principal borrower among low- and middle-income countries and by far the largest economy. Excluding China, the average external debt-to-GNI ratio for other low- and middle-income countries stood at 36 percent at end 2016, up from 34 percent in 2015.
Moreover, nearly 30 percent of countries (26 percent in 2015) had a debt-to-GNI ratio above 60 percent, including 10 percent of countries where it was over 100 percent. Europe and Central Asia was the most indebted region with an average debt-to-GNI ratio of 53 percent at end 2016 from 47 percent in 2015. About 62 percent of countries in the region had debt-to-GNI ratio above 60 percent.
Figure 13: External Debt-to-GNI Ratio: Regional Distribution, 2016
The deterioration in debt indicators in recent years was attributable to sluggish global growth and downturn in international commodity prices, combined, in many instances, with a significant increase in external borrowing.
Between 2010-2016 the US dollar value of GNI declined by 5.1 percent and 3.7 percent in Europe and Central Asia and Latin America and the Caribbean while the stock of external debt rose 20.7 percent and 58.7 percent, respectively, over the same period. In South Asia, external debt stock rose 53 percent but was largely offset by a 42 percent rise in GNI. Sub-Saharan Africa recorded the fastest rise in external debt stock, an increase of 61 percent from 2010-2016 but only a 13 percent increase in GNI over the same period.
Figure 14: Average Increase in External Debt Stocks and GNI, 2010-2016