Chapter

3 Contrasting External Debt Experience: Asia and Latin America

Editor(s):
Paul Streeten
Published Date:
September 1988
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I. Introduction and Summary

The debt experience of countries in Asia during the past decade presents a sufficiently sharp contrast with that of the Latin American countries to raise a question whether there are systematic differences that might explain it. Fund publications classify capital-importing developing countries into those that have encountered debt-servicing problems and others that have not.1 The former group includes countries that incurred external payments arrears during 1983–84 or rescheduled their debt during the period from the end of 1982 to mid-1985; with only a very few exceptions, countries in the Western Hemisphere are placed in this category. Again with few exceptions, Asian developing countries are placed in the group that did not encounter debt-servicing difficulties.

On the basis of a statistical examination of the debt situation in Asia (separately for East Asia2 and South Asia3) and the Western Hemisphere,4 the paper draws two broad conclusions, viz., that it is the characteristics of the debt in South Asia and the resilience of export sectors in East Asia that enabled these subregions to escape a generalized debt crisis such as affected the Western Hemisphere region.

II. Characteristics of External Debt

The two regions discussed constitute a very substantial part of the developing world. On a 1980 base, Asia accounts for about 31 percent of the total gross domestic product (GDP) of the developing countries and the Western Hemisphere for about 27 percent. Of total outstanding debt of capital-importing developing countries, Asia accounts for 23.5 percent and the Western Hemisphere for 40.6 percent. As the share of debt is higher, and that of GDP lower, in the Western Hemisphere relative to Asia in the global totals, Asian debt is only 25.3 percent of its GDP, whereas the percentage is 47.2 for the Western Hemisphere. More significant is the relationship of outstanding debt to exports of goods and services. Asia accounts for little over 25 percent of aggregate developing country exports of goods and services and the Western Hemisphere for only 16.6 percent. Not surprisingly, Asian debt is somewhat less than the annual value of its exports of goods and services, whereas in the Western Hemisphere, outstanding debt is almost three times its export receipts in the 1983–85 period (Table 1).

Turning to debt-service payments, the countries of the Western Hemisphere paid 43 percent of their export earnings, on average, in 1983–85. The Asian countries paid under 12 percent of their earnings. Even more interesting is the breakdown of the debt service between interest and amortization. In the case of the Asian group, the debt service is almost equally divided between the two components. In the Western Hemisphere, interest payments are more than double the amortization, and this is the case partly because of the very substantial amounts of principal ($70 billion) that were rescheduled during the period.

In understanding the differences in the servicing burden, two elements are significant: (1) the share of debt obtained from official or commercial sources, and (2) the share of debt contracted at floating interest rates. With the exception of a few island economies, all the countries in the Western Hemisphere region were “market borrowers”—that is, they obtained more than two thirds of their borrowings from commercial sources. In Asia, the two largest countries—India and China—were classified as “diversified borrowers” because their external borrowings in 1978–82 were more or less evenly divided between official and commercial creditors, and 15 of the remaining 21 countries were classified as “official borrowers”— that is, they obtained more than two thirds of their borrowings from official creditors. Since a substantial part of the debt contracted from commercial sources is extended at floating interest rates, over 72 percent of the total debt in the Western Hemisphete was on such terms, as against 45 percent in Asia, in the 1983–85 period.

Table 1.Western Hemisphere and Asia: Selected Indicators of External Debt Developments, 1973–85(Period averages; in percent)
1973–741975–781979–801981–821983–85
External debt (as percentage of exports of goods and services)
Western Hemisphere139.8187.6190.3238.0285.3
Asia81.185.672.177.889.0
Debt-service payments (as percentage of exports of goods and services)
Western Hemisphere21.533.336.345.443.2
Interest payments ratio17.528.230.0
Amortization ratio118.817.213.2
Asia7.48.78.610.411.7
Interest payments ratio4.15.55.9
Amortization ratio14.54.95.8
Share of total debt at floating interest rates
Western Hemisphere34.151.366.471.772.4
Asia8.121.931.338.145.2
Share of short-term debt in total debt
Western Hemisphere6.313.121.324.415.3
Asia2.910.818.419.515.4
Sources: International Monetary Fund, World Economic Outlook: A Survey by the Staff of the International Monetary Fund (Washington, April 1986).

Another major difference between the two regions is found in the currency composition of the debt. At the end of 1985, almost 82 percent of Western Hemisphere debt was denominated in U.S. dollars. In Asia, only 35 percent of debt was so denominated, while 36.4 percent was multicurrency debt, mainly from multilateral development banks, which included a certain proportion of U.S. dollars in the packages.

Before seeking to draw conclusions, one should look at South Asia and East Asia separately, as data on an all-Asia basis tend to conceal differences in debt characteristics; moreover, in each subregion, one large economy has a dominating share, and it is useful to exclude it to get a clearer picture of the remainder (Table 2).

Of the total Asian debt, only one fourth is attributable to the countries of South Asia; similarly, of the debt-service payments, as much as six sevenths of the annual payments are made by East Asia, indicating that the latter group of countries carries a predominant weight in the all-Asia averages. Measuring outstanding debt against GDP, the difference does not appear striking; as against roughly 20 percent of GDP in South Asia, the debt exposure is of the same magnitude, relative to total output, in East Asia through 1981–82 and rises to 27 percent only in 1983–85. Excluding India from South Asia roughly doubles the debt/GDP ratio for the remaining countries in that subregion. Similarly, the East Asia ratio rises to 45 percent if China is excluded, suggesting that in both subregions the exclusion of a continental-sized economy with a rather small foreign trade sector points up the much higher external debt exposure for the rest of each subregion.

A much sharper difference emerges in comparing the ratios of outstanding debt to exports of goods and services. For South Asia, outstanding debt is more than twice the annual export level for every subperiod except 1979–80 (when it is slightly lower) and reaches 2½ times annual export receipts in the latest period. If India is excluded, the ratio rises to three times export earnings, indicating that India’s exposure, relative to its export receipts, is lower than that of the other countries. A startling contrast between South and East Asia is found by comparing their debt/exports ratios, which for East Asia never approach the annual level of export earnings, being 86.5 percent in the latest subperiod and even lower in earlier years. The ratios excluding China are higher but do not change this picture materially, suggesting that China’s debt exposure, relative to its export earnings, is not significantly different from that of the other countries of East Asia.

Another difference between South and East Asia relates to debt servicing. While the former has a debt-service ratio of almost 18 percent of exports of goods and services (or 21.5 percent, excluding India) in the 1983–85 period, the ratio is almost one-third lower in the latter group. In South Asia, amortization payments are larger than interest payments, whereas the opposite is true in East Asia. The lower interest component in South Asia is a reflection of the official character of much of the borrowing and the smaller proportion of the debt contracted at floating interest rates. There was hardly any such debt up to 1978 in South Asia; thereafter, it rose from about 4 percent of the total debt in 1979–80 to about 12 percent in 1983–85. In East Asia, by contrast, floating-rate debt has steadily risen from about 10.5 percent of total debt in 1973–74 to 54 percent in 1983–85. Another factor in the higher interest component in East Asian debt service is the larger proportion of short-term debt (typically trade and interbank lines of credit, which are usually obtained at market rates). In South Asia no more than 2–3 percent of total debt is short term, as against almost a quarter in East Asia. A final difference of some importance is the currency denomination of the debt. For all Asia, roughly 12.5 percent of the debt is denominated in Japanese yen. However, the proportion is higher in East Asia than in South Asia, given the fact that some of the large debtors in the former region have a yen component higher than this average—for example, Malaysia (19.5 percent), Indonesia (15.9 percent), and Thailand (13.8 percent).5

Table 2.South Asia and East Asia: Debt Characteristics, Selected Periods(Period averages; in percent)
1973–741979–801979–801981–821983–85
All

countries
Excl.

India
All

countries
Excl.

India
All

countries
Excl.

India
All

countries
Excl.

India
All

countries
Excl.

India
South Asia
External debt (as percentage of gross domestic product)16.928.119.131.718.934.118.936.720.940.5
External debt (as percentage of exports of goods and services)277.5255.8236.6300.0198.0249.1216.1280.1256.3309.3
Debt-service payments (as percentage of exports of goods and services)21.415.116.818.512.213.613.115.117.821.5
Interest payments ratio7.26.05.76.65.06.05.47.08.39.0
Amortization ratio14.19.111.111.97.27.57.78.19.512.5
Share of short-term debt in total debt0.11.10.32.93.63.54.52.02.5
Share of total debt at floating interest rates0.10.31.30.74.14.86.46.812.17.4
All

countries
Excl.

China
All

countries
Excl.

China
All

countries
Excl.

China
All

countries
Excl.

China
All

countries
Excl.

China
East Asia
External debt (as percentage of gross domestic product)10.923.514.527.516.129.720.635.727.745.0
External debt (as percentage of exports of goods and services)58.862.768.171.863.365.970.978.086.592.5
Debt-service payments (as percentage of exports of goods and services)6.46.68.69.29.09.511.211.512.213.1
Interest payments ratio2.62.73.23.44.34.56.16.66.67.0
Amortization ratio3.83.85.45.84.75.05.24.85.66.1
Share of short-term debt in total debt2.22.413.312.125.724.627.026.723.521.6
Share of total debt at floating interest rates10.511.929.830.341.041.647.249.353.756.3
Source: International Monetary Fund.

Two inferences are suggested by the foregoing statistical survey. First, the debt exposure relative to exports is roughly equivalent in the Western Hemisphere and in South Asia. If, despite this, the latter group of countries has a debt-service ratio which is less than half that of the former, the terms on which the debt was contracted in South Asia would appear to be an important factor in explaining the differing experience. This is borne out by the low share of short-term debt; the low share of floating-interest-rate debt; and the high share of official debt, contracted on concessional terms, given the low per capita incomes of major countries in the subregion. Second, the debt/GDP ratio in East Asia (excluding China) is roughly similar to that in the Western Hemisphere The share of floating-rate debt in East Asia is more than one half of its total debt, attesting to its commercial origin, as is the case in the Western Hemisphere. Despite this similarity in the terms of debt, there is no generalized debt problem in East Asia, and the essential difference appears to lie in the fact that its debt-service ratio is only one third of the Western Hemisphere’s. A conclusion that can be drawn is that the absence of debt-servicing difficulties in East Asia must be related to the resilience of the export sector and that the Western Hemisphere’s slower rate of growth of exports, relative to the rate of growth of debt and of debt service, would be a prime element in the emergence of debt problems in this region.

There are, of course, exceptions in both regions. Even in the Western Hemisphere, there is a major country, Colombia, that did not incur debt-servicing difficulties. On the other hand, there are two countries in East Asia—the Philippines and Viet Nam—that did incur difficulties despite the fact that the subregion in which they are located remained generally free of them. There were obviously special factors that allowed these exceptions to emerge despite the fact that all countries in each region were exposed to similar exogenous developments.

The author wishes to thank seminar participants, especially the discussants of this paper—as well as Shahid Husain, Stephen Lewis, and Nicholas Stern—for helpful comments. Responsibility for the views expressed and any errors or omissions rests with the author.

See pages 31–34 of the Statistical Appendix in International Monetary Fund, World Economic Outlook: Revised Projections by the Staff of the International Monetary Washington, October 1986) for definitions and classifications of countries.

East Asia covers Hong Kong, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand, Viet Nam, Solomon Islands, Fiji, Vanuatu, Papua New Guinea, Western Samoa, and the People’s Republic of China.

South Asia covers Afghanistan, Bangladesh, Bhutan, Burma, Sri Lanka, India, Maldives, Nepal, and Pakistan.

Latin America covers all developing countries included in the Western Hemisphere classification used by the Fund’s World Economic Outlook.

Institute of International Finance, “Balance-of-Payments Trends: The East Asian Economies, IIF Overview (Washington), Vol. 2 (August 1986), pp. 5–6.

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