Quarterly Bulletin: Third Edition
Private Sector Non-Guaranteed Debt
For many years the prevailing myth was that the external debt of the private sector in low- and middle-income countries was either so small as to be inconsequential or, that, in any event, it was market determined and therefore presumed to be allocated efficiently. This notion was dispelled by the rapid changes of the late 1980s and early 1990s when barriers to international capital movements were removed without a commensurate strengthening of financial systems and regulatory frameworks, rendering economies highly vulnerable to the fallout from excessive or inappropriate borrowing by private banks and corporations. The Asian financial crisis of 1997 and its knock-on effect in countries like Russia and, subsequently, the global financial crisis of 2008 threw into stark reality the strong linkage between private sector external borrowing and the wider macro-economy. This underscores the importance of strengthening debt management, including compilation of comprehensive and timely external debt statistics, including those related to private sector debt.
To date there is no single comprehensive international data series on the external debt of low- and middle-income countries’ private sector debt but, since the start of the millennium, there has been an appreciable improvement in the coverage and quality of reporting, a process in which the World Bank’s Development Data Group (DECDG) has been instrumental. IBRD and IDA borrowers, who must provide detailed loan-by-loan reporting information on public and publicly guaranteed debt as a condition of borrowing, have been encouraged to provide aggregate annual reports on private non-guaranteed debt where such debt is deemed to be significant. Of the 123 low- and middle-income countries currently reporting to the DRS, 39 included 2015 data on the external debt of their private sector, more than double the 17 countries that provided a comparable report in 2000 (Figure 1). For the 42 of the countries that do not report on private non-guaranteed, debt information gaps are plugged in with estimates drawn from information reported to the Quarterly External Debt Statistics (QEDS) and the IMF Special Data Dissemination Standard (SDDS), or available on ministry of finance and central bank websites. The annual publication International Debt Statistics (IDS) provides important information on overall trends and composition of private non-guaranteed external debt.
Around one third of low- and middle-income countries, particularly those at the lower end of the per capita income scale, have been slow to develop systems to monitor the external obligations of their private sector and only partial, creditor-based information is available. In some cases, national compilers argue supervision runs counter to the spirit of liberalization and governments should refrain from intrusion. The private sector often employs similar arguments when confronted with survey questionnaires or other information requests. More often however, policymakers recognize the importance of these data but are challenged by lack of resources and technical capacity. Monitoring private non-guaranteed debt is more complex than tracking flows to public sector borrowers. Detailed data are only readily available when countries have registration requirements in place and these typically disappear when exchange controls are liberalized, leaving national compilers reliant on balance of payments data and financial surveys. Measurement is compounded by the multiplicity of participants involved and often, the complex structure of borrowing instruments.
Private non-guaranteed external debt is still concentrated in the more advanced emerging market countries in East Asia and the Pacific, Europe and Central Asia, and Latin America and the Caribbean but their combined share of total private non-guaranteed debt stock of low- and middle-income countries is declining (Figure 2). It is estimated to have fallen from 92 percent at end 2000 to around 80 percent at end 2015, as private sector borrowers in other regions increasingly attract external financing. Moreover, the trend is almost certainly understated on account of weak monitoring mechanisms, particularly in Sub-Saharan Africa. The International Finance Corporation (IFC), reported claims (loans and guarantees) of $26 billion at end June 2016 on forty-two Sub-Saharan African countries: most are currently without systems to monitor private sector borrowing.
Private sector external borrowing accounts for an increasing share of external debt
Over the past decade, the external debt of low- and middle-income countries has been characterized by an important shift in the type of borrower. In the past, external borrowing by sovereign governments and other public sector borrowers with a government guarantee was the most prevalent form of external borrowing. More recently there has been a rapid rise in external borrowing by private sector entities without any government guarantee (Figure 3). In 2007 private non-guaranteed debt accounted for 38 percent of total long-term external debt stock. By end 2015 the comparable share had risen to over 50 percent. Paralleling the expansion in private sector borrowing has been a change in the composition of this debt with bond issuance by private sector entities constituting an increasingly important component. It averaged over 40 percent of net long-term external debt inflows to private sector entities in the past 2-3 years. The number of low- and middle-income countries whose private sector borrows externally has also risen sharply. In Sub-Saharan Africa, excluding South Africa, over 15 percent of long-term external debt stock is now owed by the private sector and this share looks set to continue its upwards trajectory given that net inflows of private non-guaranteed debt accounted for around 25 percent of net inflows of long-term external debt over the past two years. Moreover, the figure could be much higher: many countries in the region do not, as of yet, compile comprehensive data on the external borrowing activities of the private sector and consequently, do not report on this category of debt to the World Bank Debtor Reporting System (DRS) or the Quarterly External Debt Statistics (QEDS).
World Bank Lending Outcomes in FY16 – a banner year for IBRD
FY16, the fiscal year ending June 2016, saw a surge in lending from the International Bank for Reconstruction and Development (IBRD). New loan commitments to help fund solutions to the world’s development challenges rose to $29.7 billion (Figure 4). This represented an increase of 26 percent over the comparable figure for FY15 and registered the highest annual increase in commitments in 15 years (excluding the years of the global financial crisis FY09-10). Gross disbursements were also on an upward trajectory, rising 19 percent in FY16 to $22.5 billion ($19 billion in FY15). Borrowers in Latin America and the Caribbean and Europe and Central Asia combined accounted for a little over 50 percent of IBRD’s FY16 commitment but the regions that saw the sharpest rise in commitment levels were South Asia, up 73 percent from FY15 to $3.6 billion, and the Middle East and North Africa where they rose 56 percent to $5.2 billion, of which Egypt and Iraq each accounted for $1.5 billion. As in prior years, IBRD lending was concentrated in a relatively small number of borrowers (Figure 5). The top-10 borrowers absorbed 64 percent of commitments, with Peru and India being the single largest borrowers ($2.9 billion and $2.9 billion, respectively).
The surge in IBRD commitments in FY16 was not mirrored in those of the International Development Association (IDA). IDA’s new loan commitments fell by 10 percent from their FY15 level to $14.4 billion with over 80 percent of the downturn accounted for by countries in South Asia. IDA grants also dropped precipitously, to $1.3 billion, close to half their level in the prior fiscal year, primarily on account of the full usage of the initial $895 million IDA17 Crisis Response Window (CRW) funds in FY15. Despite the fall in IDA loan commitments, gross disbursements posted a moderate, 6 percent increase in FY16, rising to $11.5 billion. Principal repayments rose marginally in FY16 to $4.3 billion - of this just three countries, Bangladesh, China and India account for 60 percent. Voluntary pre-payments by IDA graduates totaled $51 million ($28 million in FY15) boosting resources that IDA can make available to low-income countries dependent on concessional financing.
Consistent with IDA’s mandate to support the financing needs of the world’s poorest countries, on average close to 85 percent of loan commitments in FY14-16 were directed at countries in Sub-Saharan Africa and South Asia (Figure 6). IDA financing is however, even more highly concentrated than that of IBRD (Figure 7). In FY16 the top-ten recipients of IDA loans accounted for 76 percent of total lending, with Ethiopia and Vietnam the single largest borrowers, $1.9 billion and $1.7 billion, respectively.
The Seventh Debt Management Facility (DMF) Stakeholders’ Forum took place in Lusaka, Zambia on May 30-31, 2016. Entitled ‘Managing a Diverse Debt Portfolio in a Volatile Global Environment’ the Forum facilitated a discussion on the challenges of coherent and viable public debt management in low-income countries in today’s fast-changing and uncertain global environment. The target audience was policy-makers and practitioners from national debt management offices. Also present were international and regional technical assistance providers, representatives of civil society, bilateral donors and multilateral development banks. The Forum emphasized the improvements that have been achieved in public debt management in recent years including monitoring of public and external debt and the compilation of comprehensive and timely debt statistics as evidenced by reporting to international datasets including the World Bank Debt Reporting System (DRS), the Quarterly External Debt Statistics (QEDS), and the Quarterly Public Debt Statistics (QPDS). However large gaps in coverage and quality remain, particularly regarding countries in Sub-Saharan Africa. Information on domestic public sector debt and external private non-guaranteed debt and more technical assistance is required.
The Global Conference on the G-20 Data Gaps Initiative (DGI) organized by the International Monetary Fund (IMF) and the Financial Stability Board (FSB) secretariat was held in Basel, Switzerland on June 6-7, 2016. The main focus of the conference was to take stock of the key achievements of the first phase of the DGI and to formulate and prioritize implementation of the second phase of the DGI. The recommendations for DGI-2 aim to ensure continuity with DGI-1 but at the same time, reflect the evolving needs of policymakers for datasets that aid in monitoring financial sector risks and analysis of the inter-linkages across economic and financial systems. The Inter-Agency Group on Economic and Financial Statistics (IAG), in consultation with authorities of the participating economies, have set specific targets for implementation of the DGI-2 recommendations over the DGI’s five-year time horizon. For Recommendation 16, which relates to public sector debt, the target is that by 2021 all G-20 economies report comprehensive data on central and general government debt, with broad instrument coverage, on a quarterly basis. The World Bank will continue to take the lead for this component of DGI-2.