Global activity strengthened in the second half of 2013 and is expected to pick up further in 2014–15, on account of a faster recovery in the advanced economies. In contrast, the growth momentum in emerging markets remains subdued, reflecting tighter external financing conditions and homemade weaknesses in some cases. Risks around the outlook for global growth have diminished somewhat, but remain tilted to the downside.
This paper reviews recent developments in private market financing for developing countries. Bank creditors themselves have been more amenable to restructuring in an environment where secondary market discounts on bank claims were falling significantly below the level of bank provisioning. This has allowed banks to realize substantial book profits by participating in debt operations. Debt conversions have also played a substantial role in reducing commercial bank debt. The pace of such conversions, however, has slowed over the past year in response to lower secondary market discounts on external debt and to a drop in privatization-related conversions. The re-entry to international capital markets by certain middle-income countries that had experienced debt-servicing difficulties gathered momentum over the past year. Total bond issues in international markets by the main re-entrants accounted for over half of issues by developing countries in this period. In contrast to the experience in securities markets, new bank lending to market re-entrants has remained limited and is confined mainly to short-term trade lines or project financing.
This paper provides information on private market financing for developing countries, covering developments since August 1992. Progress in dealing with bank debt problems has been based in large part on persistence in the pursuit of stabilization and reform programs. Such programs have resulted in strengthened external positions that have allowed debtor countries to accumulate reserves for use in debt-reduction operations. All of the countries where negotiations are now continuing had at some point suspended payments on medium- and long-term debt. Banks have recognized that resumption of regular (albeit partial) payments can be politically difficult in the absence of a quid pro quo. The group of middle-and lower-middle income countries with debt problems still to come to terms with bank creditors on debt-reduction packages is now limited. Many of these remaining countries (including Bulgaria, Ecuador, Panama, Peru, and Poland) have already begun negotiations with creditor banks.
Economic activity in Latin America and the Caribbean (LAC) is expected to remain relatively subdued in 2014. While the faster recovery of the advanced economies should strengthen external demand, this effect is likely to be offset by the negative impact of lower commodity prices and tighter financial conditions on domestic demand. Policy priorities include strengthening public finances, addressing potential financial fragilities, and implementing structural reforms to ease supply-side constraints and raise potential growth.
A stronger U.S. recovery will impart a positive impulse primarily to Mexico, Central America, and the Caribbean, whereas the anticipated normalization of U.S. monetary policy will affect all countries in Latin America and the Caribbean (LAC). Traditional exposures to U.S. interest rates have diminished, as governments in LAC have reduced their reliance on U.S. dollar–denominated debt. However, U.S. monetary shocks also spill over into local funding and foreign exchange markets. Spillovers to domestic bond yields have typically been contained over the past decade, but the market turmoil of mid-2013 illustrates the risk of outsized responses under certain conditions. In a smooth normalization scenario, net capital inflows to LAC are unlikely to reverse, although new risk premium shocks could trigger outflow pressures. Countries cannot fully protect themselves against such external shocks, but strong balance sheets and credible policy frameworks provide resilience in the face of financial volatility.
This chapter takes another look at the commodity boom experienced by Latin America and the Caribbean (LAC) since the early 2000s and analyzes how the region will be affected by a more subdued outlook for commodity prices. The analysis suggests that growth in the years ahead could be significantly lower than during the commodity boom even if commodity prices were to remain stable at their current relatively high levels. The results caution against trying to offset the current economic slowdown with demand-side stimulus and underscore the need for ambitious structural reforms to secure strong growth over the medium term.