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Floating interest rates and developing country debt

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1982
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The sources and nature of external borrowing by developing countries as a group have changed markedly in the last decade. As the growth of the Eurodollar market gained momentum with the recycling of the surplus of the Organization of Petroleum Exporting Countries (OPEC), lending by private financial institutions at variable interest rates to non-oil developing countries increasingly outpaced traditional bilateral and multilateral official financing. Between 1975 and 1981, the debt to private financial institutions increased at an annual average rate of 24 per cent, while borrowing from official sources and other private creditors—still largely at fixed rates—grew, on average, by only 17 per cent a year. Floating rates, however, are not an overriding burden to all developing countries. At the end of 1981, about three fourths of the floating-rate debt of developing countries was held by countries classified as net oil exporters and major exporters of manufactures; the other groups, particularly the low-income countries, continued to rely to a much larger extent on official sources of financing.

External debt data do not show explicitly the share of total liabilities due at floating rates. The total medium-term and long-term external debt of the non-oil developing countries, which includes their private nonguaranteed debt, amounted to nearly US$440 billion at the end of 1981 and is projected to rise to about $500 billion by the end of 1982. The share of debt due to private financial institutions steadily increased in the 1970s from about two fifths in 1975 to over one half in 1981. The bulk of this debt—over $200 billion at the end of 1981—consisted of loans linked to a variable base rate such as the London Interbank Offered Rate (LIBOR), the cornerstone of all transactions in the Eurodollar market whose movements are closely related to those of other key rates, such as the U.S. prime rate. Interest payments on these loans are periodically adjusted to reflect a fixed margin over the floating base rate. This margin is set for each loan and reflects factors such as creditworthiness and the degree of bank exposure.

There is no doubt about the burden imposed by higher real interest rates. Six-month LIBOR on U.S. dollar deposits have become significantly positive recently as monetary policy has tightened in the major industrial countries—increasing from 9¼ per cent per annum in 1978 to 16⅝ per cent in 1981 and averaging 15 per cent in the first 8 months of 1982. The interest payments of the non-oil producing developing countries on long-term and medium-term debt rose to $37.5 billion in 1981—equivalent to 8½ per cent of their exports of goods and services. Payments in 1973, by contrast, amounted to 4⅕ per cent of their exports. To assess the burden of rising interest rates for the purpose of this note, the stock of variable rate long-term debt for different groups of countries was approximated on the basis of the information available for 1975–80. It was assumed that 95 per cent of the stock of debt to private financial institutions reported in the World Economic Outlook is at floating interest rates, the remainder being mainly issues of bonds that have not been very active in recent years. This assumption is consistent with estimates made by the World Bank in 1980 of the share of floating-rate debt in the broader total of debt owed to private financial institutions and to other private creditors—a total that includes such elements as suppliers’ credits.

Ideally, to this data for long-term debt should be added short-term debt at market rates, net of the portion of foreign assets held as deposits or securities earning market yields. However, since reliable information on assets is limited, an estimate of the net stock of floating-rate debt was made by adding the short-term liabilities of the monetary authorities to the stock of long-term, floating-rate debt for each group of countries and subtracting the floating-rate assets (Table 2). Thus, if the $46 billion stock of floating-rate assets of the non-oil developing countries is deducted from their $213 billion floating-rate debt outstanding at the end of 1981, net floating rate liabilities amounted to $167 billion. These are projected by the World Economic Outlook to rise by $36 billion in 1982 as the growth of floating-rate debt is expected to greatly outpace the accumulation of assets. A more timely analysis of debt issues would seem to justify the use of 1982 data in spite of their tentative nature.

Table 1Non-oil developing countries: long-term external debt, 1975–821(In billions of dollars, at the end of each period)
19751979198019811982
Total outstanding debt of non-oil developing countries146.8324.4375.4436.9502.2
By type of creditors:
Official creditors67.9133.3155.5175.6199.5
Private creditors78.9191.1220.0261.4305.7
Of which, unguaranteed debt(31.5)(58.6)(68.8)(84.8)(101.5)
By analytical group:
Net oil exporters31.068.978.090.6107.0
Major exporters of manufactures55.8128.3143.4169.1194.1
Low-income countries29.153.462.370.679.7
Other net oil importers30.973.891.7106.6124.3
By area:
Africa19.944.749.256.066.0
Asia36.771.685.6102.8121.4
Europe16.244.054.260.267.2
Middle East13.128.332.936.741.3
Western Hemisphere60.9135.8153.4181.2209.3
Source: IMF, World Economic Outlook, April 1982.Note: details may not add to totals due to rounding.

Includes 113 non-oil developing countries that are members of the Fund, together with certain essentially autonomous dependent territories for which adequate statistics are available. Excludes use of Fund credit, which amounted to $14.9 billion at the end of 1981; arrears; and short-term debt. Net oil exporters include countries outside the group of 12 major oil exporters that have significant production and/or exports of oil and whose oil exports exceeded their oil imports in most years of the 1970s.

Source: IMF, World Economic Outlook, April 1982.Note: details may not add to totals due to rounding.

Includes 113 non-oil developing countries that are members of the Fund, together with certain essentially autonomous dependent territories for which adequate statistics are available. Excludes use of Fund credit, which amounted to $14.9 billion at the end of 1981; arrears; and short-term debt. Net oil exporters include countries outside the group of 12 major oil exporters that have significant production and/or exports of oil and whose oil exports exceeded their oil imports in most years of the 1970s.

Table 2Non-oil developing countries: external assets and liabilities at floating interest rates (FIR), 1981–821(In billions of U.S. dollars, at the end of each period)
198119822
Net oil exporters
FIR debt50.261.1
FIR assets9.7310.2
Net FIR debt40.550.9
Major exporters of manufactures
FIR debt106.9126.0
FIR assets18.8320.5
Net FIR debt88.1105.5
Low-income countries
FIR debt8.29.5
FIR assets3.843.8
Net FIR debt4.45.7
Other net oil importers
FIR debt47.354.5
FIR assets13.6313.4
Net FIR debt33.741.1
All non-oil LDCs
FIR debt212.6251.1
FIR assets45.947.9
Net FIR debt166.7203.2
Sources: World Bank, World Debt Tables, December 1981; IMF, International Financial Statistics and World Economic Outlook, April 1982; and Fund staff estimates and projections.

Including private nonguaranteed debt.

Assuming that for each analytic group the ratio of FIR external assets to total official reserve holdings is the same as in 1981.

Ninety per cent of official foreign exchange holdings (net of short-term liabilities of monetary authorities) recorded in International Financial Statistics.

Fifty per cent of net official foreign exchange holdings recorded in International Financial Statistics.

Sources: World Bank, World Debt Tables, December 1981; IMF, International Financial Statistics and World Economic Outlook, April 1982; and Fund staff estimates and projections.

Including private nonguaranteed debt.

Assuming that for each analytic group the ratio of FIR external assets to total official reserve holdings is the same as in 1981.

Ninety per cent of official foreign exchange holdings (net of short-term liabilities of monetary authorities) recorded in International Financial Statistics.

Fifty per cent of net official foreign exchange holdings recorded in International Financial Statistics.

The following exercise assumes, for simplicity, that a temporary increase in LIBOR occurs in the beginning of the year and is reversed at year’s end. Increases over a shorter period would, of course, generate a proportionally smaller burden. Conversely, the burden of permanent increases in interest rates would apply not only to a longer period but also to a rising stock of debt. Under these assumptions, and on the basis of an average floating-rate debt of $232 billion projected for the course of 1982, each percentage point increase in LIBOR would worsen the debt service ratio of non-oil developing countries by about half a percentage point (Table 3). However, as indicated above, this would overstate the burden since non-oil developing countries also hold sizable market-related assets. Taking these into account—that is, with a net floating-rate debt of $185 billion estimated for 1982—each percentage point increase in LIBOR would result in additional interest payments by these countries of $1.85 billion during the year, or the equivalent of 0.4 per cent of their exports of goods and services. The heaviest burden, of about $970 million, would be borne by major exporters of manufactures—the largest holders of floating-rate debt—while those net oil exporters included in this group (see footnote 1 to Table 1) and other net oil importers would face additional burdens of about $460 million and $370 million, respectively.

Table 3Non-oil developing countries: floating-rate debt and interest burden(In millions of U.S. dollars)
Interest burden of a one percentage

point increase in LIBOR in 1982
Average floating interest

rate debt outstanding during 19821
Additional interest

burden
Exports of goods and servicesAdditional interest

burden as a percentage of exports of goods and services
Gross

debt
Net

liabilities2
GrossNetGrossNet
Net oil exporters355,70045,70055745783,0000.70.6
Major exporters of manufactures116,50096,8001,165968233,0000.50.4
Low-income countries8,9005,100895135,0000.30.1
Other net oil importers50,90037,400509374107,0000.50.3
All non-oil developing countries232,000185,0002,3201,850458,0000.50.4
Sources: IMF, World Economic Outlook, April 1982; Table 2; and Fund staff projections.

Arithmetic average of stocks outstanding at the end of 1981 and 1982. Notice that data refer to average debt outstanding during 1982, while data in Table 2 refer to end of period stocks.

Gross debt net of floating-rate assets.

See footnote 1 to Table 1.

Sources: IMF, World Economic Outlook, April 1982; Table 2; and Fund staff projections.

Arithmetic average of stocks outstanding at the end of 1981 and 1982. Notice that data refer to average debt outstanding during 1982, while data in Table 2 refer to end of period stocks.

Gross debt net of floating-rate assets.

See footnote 1 to Table 1.

The debt service burden of developing countries as a group will remain large in the 1980s, reflecting current borrowing needs as well as the rollover of past debt. This will happen even with the shift of major borrowers from large-scale foreign borrowing to a greater mobilization of domestic savings, which is needed to stabilize the debt service ratio at sustainable levels. Floating interest rates will thus continue to be a burden for developing countries, the severity of which would only be lessened if real interest rates in industrial countries declined on a lasting basis.

Paulo Neuhaus

Exchange and Trade Relations

Department, IMF

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