This section shows how public, banking, and non-financial private sector balance sheets in emerging market countries have become more integrated over the past decade.9 It also provides a toolkit for assessing vulnerabilities, even with limited data. To highlight common trends and differences between 1992 and 2002, a sample of 25 emerging market countries is considered.10 The countries are grouped into four regions: Latin America; East Asia; Central and Eastern Europe; and Middle East, Africa, and Turkey.11 It should be noted at the outset that the small sample size for each region and sometimes sketchy data (especially for 1992) do not allow for a complete picture of relevant strengths and vulnerabilities. The primary purpose of this section is therefore to show the usefulness of the methodology rather than provide an authoritative view of the state of emerging market countries’ balance sheets.
The Public Sector’s Balance Sheet
The Liability Side
Public debt levels generally have increased over the last decade (Figure 3.1). The average debt-to-GDP ratio (including IMF credit) of emerging market economies has risen from 60 percent in 1992 to some 70 percent in 2002—levels generally viewed as cause for concern.12 Europe is the only exception to the rising trend because some of these countries embarked on the transition process with very high debt ratios—partly attributed to the serious underestimation of GDP at the start of the period—which they subsequently managed to reduce.13 The fiscal policy stance is the underlying cause of the rise in public debt, but combined currency and banking crises, which involved large bank restructuring costs and currency devaluations, have played a significant role in the rise of public (domestic) debt for the Asian crisis countries, but also for several in Latin America as well as Turkey.14 The rise in public debt may be understated, as contingent liabilities arising, for example, from public guarantees in public-private partnerships—which have increased recently—are generally not recorded in the public debt statistics.
Public Debt, 1992 and 2002
(In percent of GDP)
Sources: See Appendix.The share of domestically issued public debt has risen, outpacing the rise in external debt in most regions (Figure 3.2).15 The growth of domestic debt markets reflects the success of many emerging market economies in reducing inflation and deepening financial markets, though, as noted above, in several cases, the placement of large domestic bond issues for bank recapitalization in the wake of financial crises contributed as well. As discussed below, domestic banks have often become significant holders of the sovereign’s domestic debt, and, in some cases, of the sovereign’s international debt as well, directly linking the soundness of the banking system to the sovereign’s financial health.
Public Domestic Versus Public External Debt, 1992 and 2002
(In percent of GDP)
Source: See Appendix.There is little evidence that the risks associated with higher debt levels have been systematically offset by improved debt structures. In fact, at least in some regions, several measures point to an increased exposure to various market risks:
-
Currency risk. Despite the growing importance of domestic debt, the share of foreign-currency-denominated debt is substantial (Figure 3.3). Many emerging market governments have difficulty placing long-term debt in their own currency on the domestic market. The critical mass needed to develop a sufficiently deep market may be missing, or investors may simply lack confidence in the stability of the domestic currency—an important factor in many of the Latin American and Middle Eastern countries where memories of high inflation are still fresh.16 In this situation, governments have often resorted to indexing domestic debt to the exchange rate. Despite the debt’s settlement in domestic currency, this creates currency risk that is similar to debt denominated in foreign currency.17
-
Rollover risk. Official holders of sovereign debt are being replaced by private holders (Figure 3.4)—a creditor group that is arguably less inclined to roll over its exposure at times of stress.18 This trend also implies a shortening of maturities (Figure 3.5), as sovereign bonds issued on international capital markets tend to mature earlier (5–10 years) than debt owed to official creditors (15–30 years). Moreover, Brady bonds—often issued at (original) maturities of up to 30 years—have been increasingly swapped for regular global bonds with shorter maturities. However, the shortening of maturities also reflects a strategy to lower debt-service costs in the face of falling interest rates. While such aggregate measures say little about maturity structures (i.e., debt humps in particular years), they are indicative of a broad trend that debt contracts need to be renewed more frequently, exposing sovereigns to rollover risk.
-
Interest rate risk. Comparable data for 1992 are not available, but in several countries—especially in Latin America—debt is linked to the local interest rate (floating debt), at times even to the central bank’s overnight rate (Figure 3.6). Such debt may have a relatively extended maturity, implying reduced rollover risk. However, it carries many of the other risks associated with short-term debt. In particular, debt service becomes more onerous during economically difficult times when financial policies are often tightened.
Privately Held Versus Officially Held External Public Debt, 1992 and 2002
(In percent of total public debt)
Source: See Appendix.Average Maturity of Public External Debt, 1990–91 and 2000–01
(Stock of external public debt divided by two-year average of amortizations)
Source: See Appendix.Structure of Domestic Government Bonds, 2001
(In percent of total)
Source: See Appendix.As a result, emerging market public sector debt is quite sensitive to sudden swings in the exchange or interest rate. Standard stress tests from the IMF’s DSA framework—a two-standard deviation shock to the short-term real interest rate and a 30 percent depreciation of the exchange rate—provide a rough sense of the vulnerabilities involved (Figure 3.7). The impact of the two shocks on emerging market public sector debt is substantial, in both cases raising the debt-to-GDP ratio by some 10 percentage points. A similar picture emerges if one examines the impact of a “joint” shock, which adds to these shocks a one-standard deviation decline of GDP growth and the primary fiscal balance.
Public Sector Debt Sustainability Assessments
Sources: See Appendix.The Asset Side
The weakening of the liability side of the public sector’s balance sheet has not, in general, been matched by adequate improvements on the asset side. As discussed in International Monetary Fund (2003a), the lack of sufficient fiscal adjustment raises questions about emerging market countries’ capacity to cope with the increase in public sector debt burdens.
-
Government primary surpluses. Despite some improvement in revenue ratios, the sector’s net assets (present values of flows) have generally worsened. Only in the European transition countries have average primary balances improved, but still remain negative (Figure 3.8).
-
Exports. The ratio of public external debt to regular foreign currency inflows has generally improved (Figure 3.9). Taken at face value, this traditional measure of external viability may provide some comfort. But the flow of such receipts is not exclusively available to the public sector, as it increasingly competes with the needs of the private sector for foreign exchange.
Primary Balance, 1992 and 2002
(In percent of GDP)
Sources: See Appendix.Total Public External Debt, 1992 and 2002
(In percent of exports of goods and nonfactor services and net private transfers)
Sources: See Appendix.The rise in official reserves is the main bright spot on the public sector’s balance sheet over the past decade—although in some cases it mainly reflects large IMF credits. Reported holdings of the public sector’s financial assets (both in dollar terms and as a share of GDP) are significantly higher across all regions, and especially in Asia (Figure 3.10).19 However, reserves as a percent of GDP grew much slower in the Middle East, Africa, and Turkey region (owing to Turkey) and even declined in Latin America (owing to Argentina, Brazil, and Uruguay) if credit from the IMF is netted out. While higher reserve assets are a strength from a balance sheet perspective, they involve costs.
Gross and Net Reserves, 1992 and 2002
(In percent of GDP)
Sources: See Appendix.However, official reserve figures typically do not account for contingent liabilities on the central bank’s balance sheet. The case studies in Section IV show how the private sector often has claims on the public sector’s reserve assets, either from direct liabilities (e.g., deposits at the central bank) or as a result of the implicit contingent claims created by the public sector’s policy commitments (e.g., protection from systemic banking crisis or commitment to a fixed exchange regime). For example, in economies with dollarized banking systems, domestic banks may hold foreign exchange assets at the central bank to meet reserve requirements. Because these constitute liabilities to residents, they are sometimes not counted against reported net international reserve figures. Nevertheless, such domestic liabilities are often a drain on reserves in periods of stress.20 An assessment of reserve adequacy against broad measures of potential demand for foreign currency liquidity would provide a fuller picture of vulnerabilities.
The Financial Sector’s Balance Sheet
The financial sector has grown in almost all regions, making the health of its balance sheet central to any assessment of economies’ overall resilience to shocks (Figure 3.11).21 Commercial banks’ balance sheets are at the core of the allocation and transmission of risk in any economy. Maturity transformation—taking in short-term deposits to extend longer-term loans—is fundamental to financial intermediation, giving rise to the well-known risk of deposit runs. The financial systems of emerging market countries often face challenges not typically found in advanced economies: to accommodate loan demand, banks may tap foreign credit lines; to attract depositors, banks may offer foreign currency deposits; banks may extend domestic loans in foreign currency to match their foreign currency liabilities; as a consequence of high public sector deficits, banks may have a large exposure to government paper. Also, supervisory frameworks and practices are often less developed than in advanced economies. On the other hand, the growth of the banking sector has in many countries been accompanied by a significant increase in foreign capital participation, which can lead to improved risk management practices. Parent banks are also a possible source of direct financial support at times of crisis. Further, in the wake of large financial crises, and aided by the FSAP, banking supervision has generally improved.
Banking Sector Assets, 1992 and 2002
(In percent of GDP)
Sources: See Appendix.Banks’ exposure to the sovereign generally has increased—a linkage that accentuates the potential for spillovers between the financial and the public sector (Figure 3.12). The increase in bank exposure to the public sector has been most pronounced in the Middle East and Latin America, with average public sector credit amounting to 40 percent of bank assets. Such interconnections between the balance sheets of the public sector and the banking system were particularly important during Argentina’s 2001 crisis (see Section IV).
Credit to Private Versus Public Sectors, 1992 and 2002
(In percent total loans)
Sources: See Appendix.Bank balance sheets’ direct and indirect exposure to currency risk has increased in the wake of an upsurge in foreign currency deposits and loans. Dollarization is another example of how domestic balance sheets interconnect:
-
On average, 40 percent to 45 percent of bank deposits in Europe, Latin America, and the Middle East are denominated in foreign currency. In East Asia the share of foreign currency deposits remains much smaller, although the 2002 share of around 12 percent is twice that in 1992 (Figure 3.13). Patterns of such dollarization are highly uneven: in some countries (e.g., Croatia, Lebanon, and Uruguay) foreign currency deposits greatly exceed domestic currency deposits, while in others (e.g., Brazil) their share is zero because banking legislation does not permit the holding of foreign currency deposits. In the event of a devaluation, the liability side of banks’ balance sheets would be greatly inflated.
-
In an effort to balance their domestic foreign currency liabilities, banks have increased their foreign currency lending to residents (Figure 3.14). Thus, most domestic foreign currency deposits are offset by domestic foreign currency loans, not by assets held abroad (the banking sector’s net foreign asset positions are positive, but close to balance). This implies that, in the event of an exchange rate adjustment, banks’ balance sheets crucially depend on the performance of their domestic foreign currency loans and, ultimately, the existence of a viable export sector. Consequently, the exposure of the banking sector’s balance sheet to currency risk cannot be adequately assessed without understanding currency mismatches on the balance sheets of the nonfinancial private sector.
Foreign Currency Deposits, 1992 and 2002
(In percent of total deposits)
Sources: See Appendix.Domestic Foreign Currency Loans, 1992 and 2001
(In percent of total loans)
Source: See Appendix.Dollarization also implies that the banking system can be the source of large foreign currency liquidity needs in a crisis. Banks that undertake maturity transformation in foreign currency—offsetting short-term funding from domestic dollar deposits with less liquid domestic dollar-denominated loans—are vulnerable both to a run and to the risk that exchange rate fluctuations will lead to a sharp deterioration in the quality of a bank’s loan portfolio (credit risk). As the case studies in Section IV demonstrate, large positions of liquid foreign currency assets can increase the resilience of dollarized banking systems both because they may be a source of emergency liquidity, and because these assets typically continue to perform in the event of a domestic shock. Since commercial banks’ own foreign exchange resources are often not sufficient, central banks have in many cases acted as lender of last resort—with moral hazard implications. Figure 3.15 relates potential short-term foreign exchange claims (including deposits) to available liquidity buffers, including from the public sector’s balance sheet. The above-mentioned buildup of official reserves has generally improved the ability to cover potential drains, especially in Asia. Latin America is again the exception.
Short-Term External Debt and Foreign Currency Deposits, 1992 and 2002
(In percent of reserve assets)
Sources: See Appendix.The Nonfinancial Private Sector’s Balance Sheet
In the nonfinancial private sector, as elsewhere, domestic debt has been replacing external debt.22 The average external debt level across regions more than halved from 40 percent to less that 20 percent of GDP, falling markedly in all regions except in the Middle East, Africa, and Turkey group (Figure 3.16). At the same time, loans from the domestic banking sector rose from 30 percent to 45 percent of GDP, leaving the average overall debt level almost unchanged.
Nonfinancial Private Sector Debt, 1992 and 2002
(In percent of GDP)
Sources: See Appendix.Because a high share of domestic debt is denominated in foreign currency, the sector’s exposure to various market risks remains substantial. In 2001, the average amount of foreign currency debt still amounted to over 30 percent of GDP—somewhat more than in 1994—of which only two-thirds constituted debt owed to nonresidents (Figure 3.17).23 This foreign-currency-denominated domestic debt, which is the flip side of the rise in banks’ foreign currency loans described earlier, creates a vulnerability to currency risk among indebted households and firms.
Moreover, there is evidence that it combines with rollover risk: while the overall level of the private sector’s (banks and corporations) external debt on average fell by more than half, short-term external debt declined by less than one-third. This is probably the result of an increased share of external trade credit (which typically is short term), as trade flows have increased and longer-term project financing is increasingly derived from domestic sources.
External assets of the nonfinancial private sector have decreased overall. Figure 3.18 shows holdings of households and corporations in banks of BIS-reporting countries. While indicative of trends, this excludes a number of important financial centers (e.g., those offshore) and the average again conceals some regional disparities. Specifically, the fall in average assets is driven by very large decreases in two countries—Lebanon and Panama, in the former case presumably driven by repatriations in the postwar reconstruction period. Excluding these countries, external assets in both Latin America and the Middle East, and the sample as a whole, increased slightly.
Liabilities of BIS-Reporting Banks to Nonfinancial Private Sector, 1992 and 2002
(In percent of GDP)
Sources: See Appendix.As regards external flows of the nonfinancial private sector, the ratio of foreign currency debt to exports and remittances has increased slightly from 85 percent in 1994 to 90 percent in 2001 (Figure 3.19), though there are large regional discrepancies. While the ratio fell substantially in both East Asia and Central and Eastern Europe, it increased in Latin America—from already very high levels—and Middle East, Africa, and Turkey, the latter largely on account of Lebanon, where foreign exchange loans increased strongly over the period. Corporations and households that have no direct foreign currency earnings are a particular source of risk to banks in the event of a depreciation of the exchange rate. This is especially true for households, which have only limited access to hedging and foreign exchange earnings (except remittances).
Currency forward markets may provide corporations the opportunity to hedge their exchange rate risk. In many of the more advanced emerging market economies, markets for currency forwards or swaps exist in which corporations without sufficient foreign currency receipts can hedge their exposure. Such off-balance-sheet transactions can help to distribute the risk to those entities that can best cope with it; for example, corporations with strong export revenues, banks with long dollar positions, or the public sector. Brazil, described in detail in the next section, provides an example of the latter. But for the economy as a whole, such operations can only be effective if they involve nonresidents as ultimate providers of short foreign exchange exposure. Otherwise, the risk is only shifted from one balance sheet to the other within the economy.
Presenting Economy-Wide Vulnerabilities
Some of the key indicators of sectoral vulnerabilities can be summarized in a diamond-shaped figure. In principle, any of the measures of vulnerability in the public or private sector discussed above can be used. For illustration, Figures 3.20 to 3.22 present some well-known metrics, which include the following:
Economy-Wide Vulnerabilities, Emerging Market Countries, 1992, 1997, and 2002
Sources: See Appendix.1 Reserves are the stock of gross reserves and foreign assets of the banking system. Assumes no net open currency position in the banking sector.2 Public and publicly guaranteed medium- and long-term external debt.3 The sum of exports of goods and nonfactor services and net private transfers in the given and prior year.Economy-Wide Vulnerabilities, Regional, 1992 and 2002
Sources: See Appendix.1 Reserves are the stock of gross reserves and foreign assets of the banking system. Assumes no net open currency position in the banking sector.2 Public and publicly guaranteed medium- and long-term external debt.3 The sum of exports of goods and nonfactor services and net private transfers in the given and prior year.Vulnerabilities in Crisis and Noncrisis Countries, 1992 and 20021
Sources: See Appendix.1 Crisis cases include Argentina, Brazil, Ecuador, Indonesia, Korea, Mexico, Philippines, Russia, Thailand, Turkey, and Uruguay.2 Reserves are the stock of gross reserves and foreign assets of the banking system. Assumes no net open currency position in the banking sector.3 Public and publicly guaranteed medium- and long-term external debt.4 The sum of exports of goods and nonfactor services and net private transfers in the given and prior year.-
Public debt as a share of revenue, as a proxy for public debt sustainability;
-
Short-term external debt (amortizations in one year) as a share of public sector debt, as a gauge of rollover risk in the public sector;
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External debt as a share of exports, as a proxy of external sustainability; and
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Short-term debt and domestic foreign currency deposits over reserves, as a more comprehensive measure of rollover risk (including that related to domestic depositors) and currency risk.24
For all regions taken together, some vulnerabilities have increased as others have declined over the last decade. In the past five years, however, vulnerabilities have unambiguously increased. In the example shown in Figure 3.20, the left panel shows the situation in 2002 compared to 1992; the right panel compares 2002 with 1997.
Between 1992 and 2002, public sector debt sustainability and rollover risks deteriorated. On the other hand, the risk of combined currency and liquidity crises has diminished, if one assumes that the public sector is prepared to use the recent surge of its official reserves to provide emergency liquidity support. The comparison between the situations in 1997 and 2002 illustrates that in conducting this kind of analysis, the choice of base year matters—worldwide vulnerabilities unambiguously increased in the later part of the 1990s, reflecting a series of financial crises that negatively affected a number of countries in the sample.
Important differences emerge across regions and between countries that experienced a crisis and those that did not. While Central and Eastern Europe has clearly become less vulnerable, Latin America appears more crisis-prone at the end of 2002, especially with regard to its public debt (see Figure 3.21). Vulnerabilities have unambiguously increased in countries that experienced a crisis during the last decade, as their public balance sheets were damaged by loss of market access, devaluation, and forced bank recapitalization (Figure 3.22). In noncrisis countries, by contrast, some vulnerabilities were reduced, in particular regarding the reserve coverage of short-term foreign currency liabilities. The case studies in the next section further highlight balance sheet developments in crisis and noncrisis countries.
Caution is in order when interpreting any such set of vulnerability indicators. The comparison between 1992 and 2002 may overlook recent trends, and the choice of indicators may not capture important balance sheet vulnerabilities. For example, the unequivocal improvement in Central and Eastern Europe, as measured by the metrics chosen, could well mask the risks associated with the credit booms, current account widenings, and rigid exchange rate regimes recently observed in some of these countries. The purpose of Figures 3.20–3.22 is, therefore, not to assess the present probability of crises in individual countries or regions—this is done much more accurately in the IMF’s internal vulnerability exercise—but rather to propose a way of presenting balance sheet risks across time and countries.
Appendix. Regional Groupings and Data Sources and Definitions
A. Regional Groupings
A. Regional Groupings
| Region | Countries |
|---|---|
| Central and Eastern Europe | Bulgaria |
| Croatia | |
| Hungary | |
| Poland | |
| Russia | |
| Slovak Republic | |
| Ukraine | |
| East Asia | Indonesia |
| Korea | |
| Malaysia | |
| Philippines | |
| Thailand | |
| Latin America | Argentina |
| Brazil | |
| Colombia | |
| Ecuador | |
| Mexico | |
| Panama | |
| Uruguay | |
| República Bolivariana de Venezuela | |
| Middle East, Africa, and Turkey | Egypt |
| Lebanon | |
| Morocco | |
| South Africa | |
| Turkey |
A. Regional Groupings
| Region | Countries |
|---|---|
| Central and Eastern Europe | Bulgaria |
| Croatia | |
| Hungary | |
| Poland | |
| Russia | |
| Slovak Republic | |
| Ukraine | |
| East Asia | Indonesia |
| Korea | |
| Malaysia | |
| Philippines | |
| Thailand | |
| Latin America | Argentina |
| Brazil | |
| Colombia | |
| Ecuador | |
| Mexico | |
| Panama | |
| Uruguay | |
| República Bolivariana de Venezuela | |
| Middle East, Africa, and Turkey | Egypt |
| Lebanon | |
| Morocco | |
| South Africa | |
| Turkey |
B. Data Sources and Definitions
B. Data Sources and Definitions
| Figure | Sources and Definitions | Missing Observations |
|---|---|---|
| Figure 3.1. | IMF, Fiscal Affairs Department, and IMF (2003c) for Slovak Republic. | For 1992: Colombia, Croatia, Egypt, Panama, Russia, Slovak Republic, Thailand, and Ukraine. |
| Figure 3.2. | IMF, Fiscal Affairs Department. | For 1992: Colombia, Croatia, Egypt, Hungary, Lebanon, Panama, Russia, Slovak Republic, Thailand, and Ukraine. |
| For 2002: Slovak Republic. | ||
| Figure 3.3. | IMF staff estimates. | For 2002: Slovak Republic. |
| Figure 3.4. | World Bank, Global Development Finance. Private = [public and publicly guaranteed (PPG) medium- and long-term (MLT) external debt owed to private creditors]/(total PPG MLT external debt)*100. Public = 1–private. | For 1992: Croatia and South Africa. |
| Figure 3.5. | IMF staff estimates. | For 1991: Croatia, South Africa, and Ukraine. |
| Maturity = (total PPG MLT external debt)/(PPG MLT external amortization for current plus prior year). | ||
| Figure 3.6. | J.P. Morgan (2002). | For 2001: Argentina, Bulgaria, Colombia, Croatia, Ecuador, Egypt, Korea, Lebanon, Morocco, Panama, Russia, Ukraine, and Uruguay. |
| Figure 3.7. | IMF, World Economic Outlook database and as calculated in IMF debt sustainability templates. | For 1992: Argentina, Hungary, Panama, and Slovak Republic. |
| For 2002: Argentina, Hungary, Panama, and Slovak Republic. | ||
| Figure 3.8. | IMF, World Economic Outlook database, and IMF staff estimates for Turkey, Korea, Malaysia, Philippines, and Thailand in 2002. | For 1992: Korea, Malaysia, Philippines, Thailand, and Ukraine. |
| Primary surplus = (primary balance/exchange rate)/GDP*100. | ||
| Figure 3.9. | IMF, Fiscal Affairs Department for debt and World Economic Outlook database for other. Public external debt/exports = [(external debt in percent of GDP/100)* World Economic Outlook database GDP]/[(exports of goods and nonfactor services + net total transfers–net official transfers)/exchange rate]*100. | For 1992: Colombia, Croatia, Egypt, Hungary, Lebanon, Panama, Russia, Slovak Republic, Thailand, and Ukraine. |
| For 2002: Slovak Republic. | ||
| Figure 3.10. | IMF, International Financial Statistics for use of IMF credit and World Economic Outlook database for other. | For 1992: Slovak Republic. |
| Gross reserves = stock of reserves at year-end/GDP*100. Net reserves = [(stock of reserves at year-end)–(use of IMF credit)]/GDP*100. | ||
| Figure 3.11. | IMF, World Economic Outlook database for GDP and exchange rate and International Financial Statistics for other. Banking sector assets/GDP = [(Reserves + foreign assets + claims on central government + claims on state and local governments + claims on nonfinancial public enterprises + claims on private sector + claims on other banking institutions + claims on nonbank financial institutions)/exchange rate]/GDP*100. | For 1992: Argentina, Bulgaria, Croatia, Malaysia, Russia, and Slovak Republic. |
| For 2002: Ecuador. | ||
| Figure 3.12. | IMF, World Economic Outlook database for GDP and International Financial Statistics for other. Public = (claims on central government + claims on state and local governments + claims on nonfinancial public enterprises)/exchange rate. | For 1992: Argentina, Croatia, Russia, and Slovak Republic. |
| For 2002: Ecuador and Slovak Republic. | ||
| Private = (claims on private sector)/exchange rate. | For 1992: Croatia, Russia, and Slovak Republic. | |
| For 2002: Ecuador. | ||
| Figure 3.13. | De Nicoló, Honohan, and Ize (2003), and IMF staff estimates for Brazil. | For 1992: Colombia, Croatia, Hungary, Lebanon, Malaysia, Mexico, Morocco, Panama, Philippines, Poland, Russia, Slovak Republic, Uruguay, and Venezuela |
| For 2002: Colombia, Hungary, Morocco, Panama, and Slovak Republic. | ||
| Figure 3.14. | De Nicoló, Honohan, and Ize (2003). | For 2002: All Latin American countries, Croatia, Egypt Lebanon, Malaysia, Morocco, Philippines, Poland, Russia, Slovak Republic, South Africa, Thailand, and Ukraine. |
| Figure 3.15. | IMF, International Financial Statistics for foreign assets and World Economic Outlook database for other. Short-term foreign currency debt = (total short-term debt of the economy outstanding, remaining maturity)/[(stock of reserves at year-end) + (foreign assets/exchange rate)]*100. | For 1992: Colombia, Hungary, Korea, Morocco, Panama, and Slovak Republic. |
| For 2002: Brazil, Colombia, Croatia, Ecuador, Morocco, Panama, and Philippines. | ||
| Foreign currency deposits = (demand deposits/exchange rate)*(share of foreign currency deposits in total)/[(stock of reserves at year-end) + (foreign assets/exchange rate)]*100. | For 1992: Colombia, Croatia, Hungary, Korea, Lebanon, Malaysia, Mexico, Morocco, Panama, Philippines, Poland, Russia, Slovak Republic, Uruguay, and Venezuela. | |
| For 2002: Colombia, Hungary, Korea, Morocco, Panama, and Slovak Republic. | ||
| Figure 3.16. | IMF, International Financial Statistics for claims on private sector and World Economic Outlook database for other. Domestic = (claims on the private sector/exchange rate)/GDP*100. | For 1992: Croatia, Russia, and Slovak Republic. |
| External = external debt outstanding by private debtors at year-end/GDP*100. | For 1992: Korea and Poland. For 2002: Korea. |
|
| Figure 3.17. | IMF, World Economic Outlook database for debt and Fiscal Affairs Department for 1992 debt for Argentina, Brazil, Ecuador, Indonesia, Mexico, Uruguay, and Venezuela;IMF, International Financial Statistics for claims on the private sector. De Nicoló, Honohan, and Ize (2003) for foreign currency loans in percent of total loans. | |
| External = [(total external debt outstanding at year-end)–(debt outstanding to official debtors)]/GDP*100. | For 1994: Brazil, Bulgaria, Croatia, Indonesia, Korea, Panama, Poland, and Ukraine. | |
| For 2001: Brazil, Hungary, Korea, and Poland. | ||
| Domestic foreign currency debt = [(claims on the private sector)/exchange rate*(foreign currency loans in percent of total loans)]/GDP*100. | For 1994: Brazil, Colombia, Ecuador, Egypt, Malaysia, Morocco, Panama, Philippines, Poland, Russia, South Africa, Thailand, Ukraine, Uruguay, and Venezuela. | |
| For 2001: Brazil, Colombia, Croatia, Ecuador, Morocco, Panama, and Philippines. | ||
| Figure 3.18. | Bank for International Settlements (BIS) for liabilities; and IMF, World Economic Outlook database for GDP. Total external liabilities of BIS-reporting banks/GDP*100. | |
| Figure 3.19. | IMF, World Economic Outlook database. As in Figure 3.17, but denominated by: [(exports of goods and nonfactor services + net total transfers–net official transfers)/(exchange rate)]*100. | For 1994 and 2001: As in Figure 3.17. |
| Figure 3.20, Figure 3.21, and Figure 3.22 | IMF, Fiscal Affairs Department and World Economic Outlook database; and World Bank, Global Development Finance. | |
| Public debt/revenue = (public debt in percent of GDP)/{[(revenue/exchange rate)/GDP]*100}*100. | For 1992: Colombia, Croatia, Egypt, Korea, Panama, Russia, Slovak Republic, Thailand, and Ukraine. | |
| For 2002: Colombia, Croatia, Egypt, Korea, Panama, Russia, Slovak Republic, Thailand, and Ukraine. | ||
| Short-term foreign currency liabilities/reserves = (short-term external debt + foreign currency deposits)/reserve assets*100. | For 1992: Colombia, Croatia, Egypt, Korea, Panama, Russia, Slovak Republic, Thailand, and Ukraine. | |
| For 2002: Colombia, Croatia, Egypt, Korea, Panama, Russia, Slovak Republic, Thailand, and Ukraine. | ||
| External debt/exports = (total external debt outstanding at year-end)/[(exports of goods and nonfactor services + net total transfers–net official transfers)/(exchange rate)]*100. | For 1992: Korea. | |
| For 2002: Korea. | ||
| Amortization/debt stock = (average of amortization of PPG MLT external debt for current and prior year)/(stock of PPG MLT external debt)*100. | For 1992: Croatia, Slovak Republic, and South Africa. | |
| For 2002: Croatia, Slovak Republic, and South Africa. |
B. Data Sources and Definitions
| Figure | Sources and Definitions | Missing Observations |
|---|---|---|
| Figure 3.1. | IMF, Fiscal Affairs Department, and IMF (2003c) for Slovak Republic. | For 1992: Colombia, Croatia, Egypt, Panama, Russia, Slovak Republic, Thailand, and Ukraine. |
| Figure 3.2. | IMF, Fiscal Affairs Department. | For 1992: Colombia, Croatia, Egypt, Hungary, Lebanon, Panama, Russia, Slovak Republic, Thailand, and Ukraine. |
| For 2002: Slovak Republic. | ||
| Figure 3.3. | IMF staff estimates. | For 2002: Slovak Republic. |
| Figure 3.4. | World Bank, Global Development Finance. Private = [public and publicly guaranteed (PPG) medium- and long-term (MLT) external debt owed to private creditors]/(total PPG MLT external debt)*100. Public = 1–private. | For 1992: Croatia and South Africa. |
| Figure 3.5. | IMF staff estimates. | For 1991: Croatia, South Africa, and Ukraine. |
| Maturity = (total PPG MLT external debt)/(PPG MLT external amortization for current plus prior year). | ||
| Figure 3.6. | J.P. Morgan (2002). | For 2001: Argentina, Bulgaria, Colombia, Croatia, Ecuador, Egypt, Korea, Lebanon, Morocco, Panama, Russia, Ukraine, and Uruguay. |
| Figure 3.7. | IMF, World Economic Outlook database and as calculated in IMF debt sustainability templates. | For 1992: Argentina, Hungary, Panama, and Slovak Republic. |
| For 2002: Argentina, Hungary, Panama, and Slovak Republic. | ||
| Figure 3.8. | IMF, World Economic Outlook database, and IMF staff estimates for Turkey, Korea, Malaysia, Philippines, and Thailand in 2002. | For 1992: Korea, Malaysia, Philippines, Thailand, and Ukraine. |
| Primary surplus = (primary balance/exchange rate)/GDP*100. | ||
| Figure 3.9. | IMF, Fiscal Affairs Department for debt and World Economic Outlook database for other. Public external debt/exports = [(external debt in percent of GDP/100)* World Economic Outlook database GDP]/[(exports of goods and nonfactor services + net total transfers–net official transfers)/exchange rate]*100. | For 1992: Colombia, Croatia, Egypt, Hungary, Lebanon, Panama, Russia, Slovak Republic, Thailand, and Ukraine. |
| For 2002: Slovak Republic. | ||
| Figure 3.10. | IMF, International Financial Statistics for use of IMF credit and World Economic Outlook database for other. | For 1992: Slovak Republic. |
| Gross reserves = stock of reserves at year-end/GDP*100. Net reserves = [(stock of reserves at year-end)–(use of IMF credit)]/GDP*100. | ||
| Figure 3.11. | IMF, World Economic Outlook database for GDP and exchange rate and International Financial Statistics for other. Banking sector assets/GDP = [(Reserves + foreign assets + claims on central government + claims on state and local governments + claims on nonfinancial public enterprises + claims on private sector + claims on other banking institutions + claims on nonbank financial institutions)/exchange rate]/GDP*100. | For 1992: Argentina, Bulgaria, Croatia, Malaysia, Russia, and Slovak Republic. |
| For 2002: Ecuador. | ||
| Figure 3.12. | IMF, World Economic Outlook database for GDP and International Financial Statistics for other. Public = (claims on central government + claims on state and local governments + claims on nonfinancial public enterprises)/exchange rate. | For 1992: Argentina, Croatia, Russia, and Slovak Republic. |
| For 2002: Ecuador and Slovak Republic. | ||
| Private = (claims on private sector)/exchange rate. | For 1992: Croatia, Russia, and Slovak Republic. | |
| For 2002: Ecuador. | ||
| Figure 3.13. | De Nicoló, Honohan, and Ize (2003), and IMF staff estimates for Brazil. | For 1992: Colombia, Croatia, Hungary, Lebanon, Malaysia, Mexico, Morocco, Panama, Philippines, Poland, Russia, Slovak Republic, Uruguay, and Venezuela |
| For 2002: Colombia, Hungary, Morocco, Panama, and Slovak Republic. | ||
| Figure 3.14. | De Nicoló, Honohan, and Ize (2003). | For 2002: All Latin American countries, Croatia, Egypt Lebanon, Malaysia, Morocco, Philippines, Poland, Russia, Slovak Republic, South Africa, Thailand, and Ukraine. |
| Figure 3.15. | IMF, International Financial Statistics for foreign assets and World Economic Outlook database for other. Short-term foreign currency debt = (total short-term debt of the economy outstanding, remaining maturity)/[(stock of reserves at year-end) + (foreign assets/exchange rate)]*100. | For 1992: Colombia, Hungary, Korea, Morocco, Panama, and Slovak Republic. |
| For 2002: Brazil, Colombia, Croatia, Ecuador, Morocco, Panama, and Philippines. | ||
| Foreign currency deposits = (demand deposits/exchange rate)*(share of foreign currency deposits in total)/[(stock of reserves at year-end) + (foreign assets/exchange rate)]*100. | For 1992: Colombia, Croatia, Hungary, Korea, Lebanon, Malaysia, Mexico, Morocco, Panama, Philippines, Poland, Russia, Slovak Republic, Uruguay, and Venezuela. | |
| For 2002: Colombia, Hungary, Korea, Morocco, Panama, and Slovak Republic. | ||
| Figure 3.16. | IMF, International Financial Statistics for claims on private sector and World Economic Outlook database for other. Domestic = (claims on the private sector/exchange rate)/GDP*100. | For 1992: Croatia, Russia, and Slovak Republic. |
| External = external debt outstanding by private debtors at year-end/GDP*100. | For 1992: Korea and Poland. For 2002: Korea. |
|
| Figure 3.17. | IMF, World Economic Outlook database for debt and Fiscal Affairs Department for 1992 debt for Argentina, Brazil, Ecuador, Indonesia, Mexico, Uruguay, and Venezuela;IMF, International Financial Statistics for claims on the private sector. De Nicoló, Honohan, and Ize (2003) for foreign currency loans in percent of total loans. | |
| External = [(total external debt outstanding at year-end)–(debt outstanding to official debtors)]/GDP*100. | For 1994: Brazil, Bulgaria, Croatia, Indonesia, Korea, Panama, Poland, and Ukraine. | |
| For 2001: Brazil, Hungary, Korea, and Poland. | ||
| Domestic foreign currency debt = [(claims on the private sector)/exchange rate*(foreign currency loans in percent of total loans)]/GDP*100. | For 1994: Brazil, Colombia, Ecuador, Egypt, Malaysia, Morocco, Panama, Philippines, Poland, Russia, South Africa, Thailand, Ukraine, Uruguay, and Venezuela. | |
| For 2001: Brazil, Colombia, Croatia, Ecuador, Morocco, Panama, and Philippines. | ||
| Figure 3.18. | Bank for International Settlements (BIS) for liabilities; and IMF, World Economic Outlook database for GDP. Total external liabilities of BIS-reporting banks/GDP*100. | |
| Figure 3.19. | IMF, World Economic Outlook database. As in Figure 3.17, but denominated by: [(exports of goods and nonfactor services + net total transfers–net official transfers)/(exchange rate)]*100. | For 1994 and 2001: As in Figure 3.17. |
| Figure 3.20, Figure 3.21, and Figure 3.22 | IMF, Fiscal Affairs Department and World Economic Outlook database; and World Bank, Global Development Finance. | |
| Public debt/revenue = (public debt in percent of GDP)/{[(revenue/exchange rate)/GDP]*100}*100. | For 1992: Colombia, Croatia, Egypt, Korea, Panama, Russia, Slovak Republic, Thailand, and Ukraine. | |
| For 2002: Colombia, Croatia, Egypt, Korea, Panama, Russia, Slovak Republic, Thailand, and Ukraine. | ||
| Short-term foreign currency liabilities/reserves = (short-term external debt + foreign currency deposits)/reserve assets*100. | For 1992: Colombia, Croatia, Egypt, Korea, Panama, Russia, Slovak Republic, Thailand, and Ukraine. | |
| For 2002: Colombia, Croatia, Egypt, Korea, Panama, Russia, Slovak Republic, Thailand, and Ukraine. | ||
| External debt/exports = (total external debt outstanding at year-end)/[(exports of goods and nonfactor services + net total transfers–net official transfers)/(exchange rate)]*100. | For 1992: Korea. | |
| For 2002: Korea. | ||
| Amortization/debt stock = (average of amortization of PPG MLT external debt for current and prior year)/(stock of PPG MLT external debt)*100. | For 1992: Croatia, Slovak Republic, and South Africa. | |
| For 2002: Croatia, Slovak Republic, and South Africa. |
The public sector includes both the general government (in most countries including public enterprises) and the central bank.
The sample consists of countries where public debt exceeds 30 percent of GDP, and where more than half of that debt is held by private creditors. This leaves out the universe of countries eligible for support under the Heavily Indebted Poor Countries Initiative or the International Development Association, but also some emerging market countries that have low public debt (e.g., the Czech Republic, the Baltic countries, and Chile) or a low share of privately held public debt (e.g., India). We also exclude small island economies such as the members of the Eastern Caribbean Currency Union, Jamaica, and Seychelles. For the exact regional country composition and detailed definitions of the variables and databases used, see the Appendix. The members covered in this sample account for 94 percent of all resources outstanding from the IMF’s General Resources Account and 84 percent of total IMF resources outstanding. Owing to data limitations, data for years outside and within the range 1992–2002 are considered in some cases.
Alternative groupings of the sample, such as by rating or capital market openness, were considered, but they ultimately did not provide for meaningful interpretation. Regional groupings, while imperfect, are stable over time, and have intuitive appeal.
For a detailed analysis of public debt in emerging market countries see International Monetary Fund (2003a, Chapter III). In that country sample, emerging market countries in 2002 had an average public debt ratio of 70 percent, compared with 65 percent for industrial countries.
This mainly reflects developments in Bulgaria and Poland, which brought down their debt ratios substantially (from 160 percent to 60 percent and from 80 percent to 50 percent, respectively) through, in part, debt restructurings and periods of high inflation.
For example, Lindgren and others (1999, p. 65) estimate the total cost of bank restructuring in Indonesia after the 1997 crisis, including central bank liquidity support, the recapitalization of banks, and the purchase of nonperforming loans, at about 50 percent of GDP by mid-1999. The cost of recapitalizing domestic banking systems in Argentina, Brazil, Mexico, and Turkey on average added nearly 15 percent of GDP to the public sector debt ratio (Collyns and Kincaid, 2003, p. 7).
Unless noted otherwise, in this paper “domestic” refers to debt issued under domestic governing law. Similarly, “international” or “external” refers to the debt’s governing law rather than the residency of the creditor or the currency denomination of the debt.
For a more detailed discussion, see Borensztein and others (2004).
In the event of a devaluation, holders of foreign-exchange-linked debt may switch to foreign-exchange-denominated assets as they question the government’s solvency. As the government services foreign-exchange-linked debt, it has to generate liquidity. In both cases, there will be pressures on reserves and/or the exchange rate. This type of debt is therefore included under foreign currency debt in Figure 3.3.
There are exceptions to this general rule: in some countries (e.g., Israel and Lebanon) private investors can be as dedicated as official creditors.
In recent years some central banks have engaged in forward transactions, including so-called nondeliverable forwards, thereby creating contingent foreign currency claims that were not recorded on their published balance sheets. The IMF’s “International Reserves and Foreign-Currency Liquidity: Guidelines for a Data Template” provides guidance on how to report such transactions in a transparent manner (see Kester, 2001).
Some central banks use exchange-rate-linked money market instruments as part of their open market policy. For example, in a period of regional exchange rate pressures during the run up to the last Brazilian presidential elections, Peru’s central bank experimented with issuing exchange-rate-linked certificates of deposit (CDs), in addition to the regular local currency CDs. Lebanon in 2003 issued high-yielding CDs denominated in domestic currency, but these could only be bought if an equivalent amount of foreign exchange was surrendered.
For the purposes of this paper, due to data limitations, the financial sector is synonymous with the banking sector.
Unless otherwise noted, the nonfinancial private sector includes households and corporations.
Data for a sufficiently large sample of countries were not available for 1992.
Since March 2003, Moody’s has been using such an index in its ratings methodology.
