289 32838 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2005 The Demand for Loans APRIL Facundo Martin, Governments Restructure Their Debt Tim Harford, and Michael Klein More than ever, governments in developing countries have access to capital markets, but most are not using it. Instead, they have Facundo Martin (fmartin1@ifc.org) is a restructured their debt portfolios, cutting the share of private private sector development sector debt and increasing the share of longer-term multilateral analyst, and Tim Harford debt. While some argue that this increase in official debt is alarming, (tharford@ifc.org) an PRESIDENCY the evidence suggests that most governments are sensibly taking economist, at the World advantage of their menu of financing options--extending maturities VICE Bank and International Finance Corporation to lessen their vulnerability to the "rollover risk" posed by shorter- (IFC). Michael Klein term debt and reducing their overall debt ratios. (mklein@worldbank.org) is chief economist at IFC The number of emerging markets rated by ple, after ranging above 10 percent for nearly a DEVELOPMENT and joint IFC­World Moody's grew tenfold between 1986 and 1999, quarter of a century, fell below 5 percent in 1999 Bank vice president and the quality of ratings has also risen (figure and so far have stayed there. for private sector SECTOR 1). In broadening the countries rated, the rat- Yet the availability of cheap money has pro- development. ing agencies were both responding to the voked no surge in indebtedness to private mar- This Note is part of a demand for ratings of emerging market sover- kets like those in the 1980s in many places, PRIVATE series exploring trends eign bonds and fueling that demand: in the especially upper-middle-income countries. Since in the aid industry, 1970s bank lending was nearly 20 times the the late 1990s a much more modest boom has including patterns of aid bond issues for emerging markets, but by the occurred in upper-middle-income countries, flows, competition, and 1990s bond issues had surpassed bank lending while borrowing from private sources by low- GROUP the effectiveness of (Setty and Dodd 2003). income countries has collapsed (see figure 1). different types of aid. This increase in credit quality has been BANK accompanied by extremely small spreads on pri- Away from private, toward multilateral debt vate debt relative to debt from the aid industry Middle-income countries have greatly reduced or other official sources (see figure 1 and box their debt burden relative to gross national 1). The improvement in average credit quality income (GNI) since 1990, in part by paying off WORLD is simple enough to explain: developing coun- substantial official debt (figure 2). By contrast, tries reduced their debt burdens and adopted low-income countries have preferred to borrow THE better policies. Median inflation rates, for exam- from official sources. In these countries private T H E D E M A N D F O R L O A N S G O V E R N M E N T S R E S T R U C T U R E T H E I R D E B T Figure Emerging markets have seen their credit ratings rise in number and quality . . . 1 Number and quality of Moody's credit ratings for emerging markets Average Standard & Poor's credit rating for emerging markets Aa A Baa Ba B 80 BB+ 60 BB BB­ 40 B+ 20 B 0 B­ 1986 1989 1994 1999 2004 1994 1996 1998 2000 2002 2004 . . . but despite the availability of cheap money have shown no recent surge in private market borrowing Spread between private and official debt for developing countries (basis points) Private sector sovereign debt as a percentage of GNI 600 40 Low income 400 Upper middle 30 Upper middle Lower middle income income income 20 Lower middle 200 income 10 0 Low income 1975 1980 1985 1990 1995 2002 0 ­200 1975 1980 1985 1990 1995 2002 Note: Rating agencies use different scales. The Standard & Poor's BB+, BB, and BB­ are comparable to the Moody's Ba. The Standard & Poor's B+, B, and B­ are comparable to the Moody's B. Source: For Moody's ratings, IMF 1999 and Moody's; for average credit ratings, IMF 2004; for all other data, World Bank, Global Development Finance database. sector debt has been falling since the mid-1990s, official debt shifting away from bilateral lenders from about 14 percent of GNI in 1994 to about and toward multilaterals over the past 15 years. 5 percent in 2002. Official finance continues to (Part of the explanation lies on the supply side: go to low-income borrowers, with the balance of some bilateral lending operations have been wound up.) Middle-income countries have also clearly Box About the data shifted away from bilateral debt. For these coun- 1 tries around 60 percent of official debt is now This Note discusses three types of sovereign debt. Bilateral debt describes loans to governments from from multilaterals, compared with around 35 other governments or government agencies, including central banks and official export credit agencies. percent in 1975. In lower-middle-income coun- Multilateral debt is debt from the multilateral agencies, such as the World Bank or the regional develop- ment banks. Official debt is the sum of bilateral and multilateral debt. Private sector sovereign debt is tries bilateral debt fell from about 45 percent of credit extended by commercial banks, exporters, or suppliers of goods or raised from the bond market. GNI in the early 1990s to about 18 percent in All graphs except the top two in figure 1 are based on data from the World Bank's Global 2002. Multilateral debt fell much more mod- Development Finance database. These graphs are limited to countries for which data are available estly, from 25 percent of GNI to 19 percent. back to 1975--typically 39 low-income countries, 26 lower-middle-income countries, and 14 upper- Upper-middle-income countries have bor- middle-income countries. These 79 countries produced 59 percent of developing country gross national rowed far less heavily, with a larger share of income (GNI) in 2002. Key omissions include China, the Russian Federation, and the countries of their debt (55 percent) from private sources. Eastern Europe. Nevertheless, when graphs are redrawn as data become available for additional coun- They too have restructured their official debt, tries, most patterns are very similar. borrowing less from bilaterals and more from multilaterals. Thus bilateral debt has become less impor- Figure A shift toward multilateral debt tant relative to multilateral debt in all country 2 income groups. As a share of total official debt, Low-income countries Total sovereign debt as a percentage of GNI it fell from 71 percent in 1975 to 40 percent in 140 2002 in low-income countries, and from 70 per- Multilateral 120 Bilateral cent to 45 percent in lower-middle-income coun- Private 100 tries. In upper-middle-income countries it fell from 63 percent to about 33 percent. 80 60 3 Who is lending? 40 Grouping countries by their recent level of 20 indebtedness gives a similar picture of the com- 0 1975 1980 1985 1990 1995 2002 position of official debt: while bilateral debt added up to 65­70 percent of total official debt Lower-middle-income countries in 1975, it fell to about 47 percent in 2002 in Total sovereign debt as a percentage of GNI severely indebted countries, 38 percent in mod- 140 Multilateral erately indebted countries, and 32 percent in 120 Bilateral less indebted ones.1 Private 100 Multilateral debt rose from less than 5 per- 80 cent of GNI in 1975 in severely and moderately 60 indebted countries to about 44 percent in 2002 40 in severely indebted countries and 40 percent in 20 moderately indebted ones. From a similar initial 0 level, multilateral debt increased to about 18 1975 1980 1985 1990 1995 2002 percent of GNI in less indebted countries. Official debt increased as a share of the total Upper-middle-income countries from the mid-1980s to the mid-1990s in all coun- Total sovereign debt as a percentage of GNI tries, regardless of indebtedness. It rose from 65 140 Multilateral percent in 1983­84 to about 78 percent in 2002 in 120 Bilateral both severely and less indebted countries, follow- 100 Private ing a similar trajectory in moderately indebted 80 countries. 60 40 Multilaterals as lender of first resort? 20 The picture emerging is that despite declining 0 spreads--and improving credit ratings for many 1975 1980 1985 1990 1995 2002 countries--the typical developing country is Source: World Bank, Global Development Finance database. shying away from borrowing on capital markets and shifting its debt portfolio toward official, that countries are using overly generous loans especially multilateral, debt. from multilaterals to extend themselves too far, The chief attraction of official debt appears postponing (but increasing) the pain of re- to be not its cost but its long maturities (figure adjustment and leaving the bill for future gen- 3). Official debt has an average maturity of erations. The optimistic view is that countries more than 20 years, while private debt has one are sensibly taking advantage of the financing of around 10 years. For low-income countries, menu offered them--extending maturities to the most avid consumers of official debt, the lessen their vulnerability to the "rollover risk" maturity of official debt is around four times posed by short-term debt and reducing their that of private debt. overall debt levels. The question is whether this is a positive The evidence here supports cautious opti- trend or a worrying one. The pessimistic view is mism. Upper-middle-income countries have T H E D E M A N D F O R L O A N S G O V E R N M E N T S R E S T R U C T U R E T H E I R D E B T Figure Long maturities are the chief attraction of official debt 3 Average maturity of sovereign debt of developing countries (years) Low income Lower middle income Upper middle income 40 30 viewpoint Official 20 is an open forum to 10 Private encourage dissemination of public policy innovations for 0 private sector­led and 1975 1980 1985 1990 1995 2002 market-based solutions for Source: World Bank, Global Development Finance database. development. The views published are those of the authors and should not be modest debt, while lower-middle-income coun- indebted if these ratios are less than 60 percent of that attributed to the World tries have reduced their debt consistently and level. Bank or any other affiliated substantially since the early 1990s. Low-income organizations. Nor do any of countries clearly remain vulnerable, but they References the conclusions represent have checked their accumulation of debt after IMF (International Monetary Fund). 1999. Inter- official policy of the World two decades and even made modest steps national Capital Markets: Developments, Prospects, and Key Pol- Bank or of its Executive toward reducing it. A possibility remains that icy Issues. World Economic and Financial Surveys. Directors or the countries indebtedness will move in the wrong direction, Washington, D.C. http://www.imf.org/external/pubs/ they represent. but the evidence suggests that developing coun- ft/icm/1999/index.htm. tries are taking a rational approach in their ------. 2004. Global Financial Stability Report. To order additional copies demand for sovereign debt, with considerable Washington, D.C. http://www.imf.org/External/Pubs/ contact Suzanne Smith, help from the multilateral development banks. FT/GFSR/2004/02/index.htm. managing editor, There have been frequent suggestions in recent Room F 4K-206, Setty, Gautam, and Randall Dodd. 2003. "Credit Rating years from nongovernmental organizations and The World Bank, Agencies: Their Impact on Capital Flows to Developing 1818 H Street, NW, some politicians that there should be no role for Countries." Special Policy Report 6. Financial Policy Washington, DC 20433. official loans in future; the evidence suggests Forum, Washington, D.C. that many countries are learning to use official Telephone: loans and that the long maturities provided by 001 202 458 7281 these loans are a valuable option for the gov- Fax: ernments of developing countries. 001 202 522 3480 Having said that, most finance for developing Email: countries is no longer sovereign debt but ssmith7@worldbank.org nonsovereign debt or equity. A forthcoming Note in this series will analyze trends in private Produced by Grammarians, flows. Inc. Printed on recycled paper Note 1. Countries are considered severely indebted if the present value of their debt service exceeds 80 percent of gross national income or 220 percent of exports, moder- ately indebted if one of these ratios is 60 percent or more of the level for severely indebted countries, and less T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l