Chapter

IV Debt–and Non-Debt-Creating Capital Flows

Author(s):
Luis Valdivieso
Published Date:
January 1999
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The experience of the Baltics, Russia, and other countries of the former Soviet Union in financing their persistently large and, in many cases, growing external imbalances, has been quite diverse even though the region as a whole has not seen a fundamental change in the average external debt burden. By the end of 1997, their total external debt was estimated at $150 billion, or an average 31 percent of GDP. This was moderately higher than in the preceding year, but not too different from that recorded in 1994–95. Despite this favorable picture for the region as a whole, it is worrisome that by the end of 1997 the debt burden had grown rapidly to approach or exceed 50 percent of GDP in five of the countries (Appendix, Table 11). The evolution of the external debt burden reflects differences in the size and composition of the financing of the current account imbalances across countries which, in turn, is closely associated with the progress achieved in macroeconomic stability and structural reform, in the initial stages of transition, almost all the countries relied on official external financing—mainly from the IMF and the World Bank—to address their external and domestic imbalances. As the transition proceeded, it became apparent that some countries were in a better position than others to manage the shift in composition of financing from official to private sources and from debt-to non-debt creating flows of capital.

Table 11.Total External Debt
19931994199519961997

Prelim.
19931994199519961997

Prelim.
(in billions of U.S. dollars)1(in percent of GDP)2
Advanced reformers0.71.01.51.92.410.89.910.29.510.3
Estonia0.080.190.270.230.219.88.57 55.44.4
Latvia30.220.360.430.430.4210.49.99.18.17.3
Lithuania30.350.480.761.191.7612.311.413.914.919.3
Intermediate reformers112.8123.5125.2129.9122.130.736.134.435.941.4
Kazakhstan1.82.8343.94.611.726.320.718.720.4
Kyrgyz Republic30.30.40.71.11.329.737.048860.576.6
Moldova0.30.50.70.81.020.038.040.042.048.0
Russia 4110.4119.8120.4124.1115.261.343.028.222.220.7
Slow reformers6.49.912.013.216.516.020.521.519.329.5
Belarus31.01.31.51.00.927.925.914.77.08.0
Turkmenistan 30.20.40.60 71.24.49.029 731.768.0
Ukraine4.27 28.19211.812.927.723.621.223.8
Uzbekistan1.01.11.82.32.618.919.517817.118.0
Countries affected by conflict1.22.22.83.44.124.253.754.941.848.2
Armenia0.10.20.40.60.914.530.829.037.852.2
Azerbaijan0.10.20.40 60.63.313.015.115.215.4
Georgia50.51.01.21.4l.53.679.242.130.229.4
Tajikistan3,40.50.80.8091.075.391.7133.683.995.6
Memorandum item:
Mean external-debt-to-GDP ratio19.729.429.626.031.7
Sources: National authorities: and IMF staff estimates.

Total debt.

In simple unweighted averages.

Exports of goods only.

Scheduled debt service.

After assumed debt rescheduling.

Sources: National authorities: and IMF staff estimates.

Total debt.

In simple unweighted averages.

Exports of goods only.

Scheduled debt service.

After assumed debt rescheduling.

All advanced reformers have managed to keep their external debt burden roughly constant at an annual average of less than 10 percent of GDP during 1992–97. while attracting progressively rising flows of non-debt-creating capital, especially foreign direct investment, to support their rising deficits, Among the intermediate reformers, there are two clear diverging trends. One can be seen in Russia and Kazakhstan, which, as in the case of the Baltics, have succeeded in gaining access to private capital markets and have attracted considerable amounts of foreign investment. Nonetheless they have recorded annual average debt-to-GDP ratios of 20 percent—twice as much as the advanced reformers—partly because of a relatively slower pace of fiscal adjustment.

The other trend has been followed by the Kyrgyz Republic and Moldova, which continue to rely heavily on external financing and have accumulated external debt equal to 77 percent and 48 percent of GDP. respectively, up from a corresponding 30 percent and 20 percent, respectively, in 1993, The evolution of external debt in these two countries—together with that in Armenia and Georgia, where the 1997 debt-to-GDP ratio was 52 percent and 29 percent, respectively, up from 15 percent and 4 percent, respectively, in 1993 is quite worrisome. The main concern is that external current account deficits in these countries may have been driven more by fast-growing consumption than by investment: hence, this raises questions as to their sustainability. The situation is also worrisome in Tajikistan, which, since independence, has carried a heavy external debt burden mainly because of its large trade-financing debts, chiefly for the energy sector, and the prolonged support from Russia, which was subsequently converted into a state debt. Azerbaijan’s situation appears to he more manageable; its export revenues associated with the projected development of the oil and gas sector are likely to dwarf the current debt burden of about 15 percent of GDP.

Finally, there is the case of the slow reformers, which have kept a very low debt burden, not necessarily as a result of their prudent debt strategies but reflecting more the difficulties in obtaining foreign financing, particularly from official sources. An exception is Turkmenistan, which faces a situation similar to that of other hydrocarbon producers in the region. Paradoxically, some of the slow reformers, such as, Ukraine and Uzbekistan, have found it relatively easier to tap resources from international private financial markets.

Consistent with the relatively low debt burden in the region and the predominance of official sources of funding, debt service has remained generally low in relation to exports of goods and non factor services (Appendix, Table 12). Debt-service ratios differ markedly across countries, reflecting the various degrees of concessionality of their stocks of debt. By the end of 1997, debt-service ratios exceeded 15 percent in 4 of the 15 countries, including Armenia, Moldova, Turkmenistan, and Uzbekistan. Debt service ratios have declined considerably in Russia and, more recently, in Tajikistan, reflecting the impact of comprehensive debt-rescheduling workouts, Despite this relatively favorable outlook, concerns remain about many of these countries’ ability to service their debts, especially because in many of the countries with the largest debt burdens the government is the major debtor or guarantor. As a result, the sustainability of the external current account is closely linked to the sustainability of the fiscal deficit, which, in turn, is closely linked to the achievement of reasonably low fiscal balances and the completion of the fiscal reform. Unless this task is completed, the traditional indicators of debt and the debt-service burden do not truly convey the degree of vulnerability to external and domestic shocks.

Table 12Debt Service 1(In percent of exports of goods and non factor services)
19931994199519961997

Prelim.
Advanced reformers1.02.11.94.06.6
Estonia1.40.40.50.91.6
Latvia 21.04.82.44.47.4
Lithuania 20.71.0296.710.7
Intermediate reformers9.110.613.49.810.6
Russia 328.226.019.614.510.2
Kazakhstan1.42.92.74.63.5
Kyrgyz Republic 26.311.420.813.711.7
Moldova0.62.010.56.317.0
Slow reformers1.97.310.98.917.3
Belarus 20.54.63.92.92.5
Turkmenistan 20.21.813.317.942.0
Ukraine1.212.19.36.09.4
Uzbekistan5.510.517.28.715.1
Countries affected by conflict1.02.613.115.711.9
Armenia0.03.020.618.717.6
Azerbaijan0.00.47.99.71 1.7
Georgia 40.00.07.3978.6
Tajikistan 2, 34.06916.424.89.6
Sources: National authorities; and IMF staff estimates.

In simple unweighted averages.

Exports of goods only.

Scheduled debt service.

After assumed debt rescheduling.

Sources: National authorities; and IMF staff estimates.

In simple unweighted averages.

Exports of goods only.

Scheduled debt service.

After assumed debt rescheduling.

The Baltics, Russia, and other countries of the former Soviet Union have gradually built up their access to international private capital markets with loans—both short and long term—being the first market segment to be tapped. As early as 1992, Russia, Kazakhstan, and Uzbekistan had contracted long-term loans for a total of over $1 billion. By the end of 1997, cumulative commitments to the countries in the region for the preceding six years had reached more than $18 billion, with access expanded to include the Baltics, the Kyrgyz Republic, and Georgia (Appendix. Table 13). Over the same period, all of the countries, except for the Kyrgyz Republic, also contracted short-term loans for over $3 billion.

Table 13.Access to International Private Financial Markets(Face value of contractual liability; in millions of U.S. dollars)
1992–97
1997(In percent of current19981
19921993199419951996Prelim.1992–97account balance)2Prelim.
Bond market754521,2108,2591,091
Estonia60625685-61.0
Kazakhstan200350550-10.0
Latvia453075-16.5
Lithuania6050200310-14.1
Moldova7575-7.5
Russia753471.1006.8798,401528150
Ukraine450450-6.2941
Equity market552982914052
Estonia7310-0.952
Kazakhstan5050-0.9
Latvia2626-5.6
Lithuania42125-1.1
Russia48238081149926.2
Short-term loans3601701923002,22681
Estonia135135-12.0
Kazakhstan1151 15-2.130
Latvia6060-13.2
Lithuania40128157325-14.830
Russia2501701641721,7602,51615.821
Ukraine7070-1.0
Uzbekistan28281.1
Long-term loans1,4705392,8952,4672,3458,203139
Estonia1425263302-26.914
Georgia7070-3.0
Kazakhstan20016463128807-14.7
Kyrgyz Republic73155228-18.0
Latvia7714-3.130
Lithuania4080120-5.520
Russia1,0202912,8281,6402,2807,50715,56597.975
Ukraine31110141-2.0
Uzbekistan25010538171108672-26.0
Source: IMF staff estimates.

Includes operations through the end of March 1996.

Assumes that all contractual obligations have been fully disbursed within the period indicated.

Source: IMF staff estimates.

Includes operations through the end of March 1996.

Assumes that all contractual obligations have been fully disbursed within the period indicated.

It was not until 1994 that the Baltics, Russia, and other countries of the former Soviet Union began establishing their presence in the bond and equity segments of the market. In general, both bond and equity issues have been dominated by Russia, which has placed not only sovereign bonds but, increasingly, corporate and municipal issues. The Baltics have also participated actively in these markets since 1994, raising as much as $1 billion altogether, Kazakhstan broke into the bond market in 1996 and 1997 for almost $550 million, and Kazakh corporations issued equity for about $50 million, Also in 1997, two newcomers, Ukraine and Moldova, placed bonds for $450 million and $75 million, respectively, Access to these markets by the Baltics, Russia, and other countries of the former Soviet Union was initially affected by the Asian crisis, although there was a deterioration in the terms of some operations, particularly for Ukraine, which more than doubled its 1997 placement of bonds in the first quarter of 1998 when it reached $963 million. Russian borrowers did not raise as much capital in the first quarter of 1998 as in the recent past, but the Baltics remained active in the long-term loan and equity markets.

The access to international private capital markets by the Baltics. Russia, and other countries of the former Soviet Union has been complemented by rapidly developing markets in domestic securities, mainly treasury bills. By the end of 1997, several of these countries relied on securities to finance their budget deficits. This change in the financing strategy, together with a relaxation of the existing restrictions on foreigners to acquire such financial assets, has established the conditions for a nourishing market. By the end of 1997, it is estimated that outstanding liabilities to foreigners in the form of treasury bills amounted to some $10—15 billion in Russia, $2 billion in Ukraine, and over $120 million in Kazakhstan.

The Baltics, Russia, and other countries of the former Soviet Union have also been able to attract increasing flows of foreign direct investment (Appendix. Table 14). During the period 1992–97, these flows exceeded $26 billion, the bulk taking place in the past three years. By the end of 1997, all of these countries had received some flows of foreign direct investment. More than half of these flows, however, have gone into Russia, and about a quarter to hydrocarbon-producing Kazakhstan, Turkmenistan, and Azerbaijan. The Baltics, Ukraine, and Uzbekistan also received large inflows. On a per capita basis, however, foreign direct investment has flowed into the most advanced reformers at a rate of almost four times the per capita flow to intermediate reformers and countries affected by conflict, and almost eight times more than to slow reformers. Per capita flows of foreign direct investment have also been high to countries developing their natural resources, mainly minerals and hydrocarbons.

Table 14.Foreign Direct Investment(In billions of U.S. dollars, unless otherwise indicated)
FDI 1992–97
Cumulative
199219931994199519961997TotalPer capita 1
Advanced reformers0.1230.2350.3980.5180.6390.8752.788424
Estonia0.0800.1540.2120.2020.1 100.1320.891594
Latvia0.0430.0510.1550.2440.3760.4151.284514
Lithuania00300.0310.0720.1 520.3280.613165
Intermediate reformers0.7001.1731.2753.1023.7368.35518.340116
Kazakhstan0.4730.6350.9641.1371.3204.529276
Kyrgyz Republic0.0450.0450.0460.0830.21948
Moldova0.0180.0730.0530.0620.20648
Russia0.7000.7000.5772.0202.5006.89013.38791
Slow reformers0.0090.1450.2770.4820.8151.0482.77754
Belarus0.0180.0110.0070.0700.1920.29829
Turkmenistan0.0790.1030.2330.1290.1080.652143
Ukraine0.0910.2660.5260.5811.46429
Uzbekistan0.0090.0480.073-0.0240.0900 1670.36316
Countries affected by conflict0.0000.0700.0450.3240.7571.3292.52690
Armenia0.0030.0190.0220.0260.07019
Azerbaijan20.0610.0220.2820.6611.1032.129280
Georgia0.0080.0060.0540.1890.25848
Tajikistan0.0090.0120.01 70.0200.011006912
Total0.8311.6231.9954.4255.94711.60726.431
Sources; National authorities; and IMF staff estimates.

In U.S. dollars; based on 1996 population data from EBRD, Transition Report, 1997.

Defined as direct and portfolio investment.

Sources; National authorities; and IMF staff estimates.

In U.S. dollars; based on 1996 population data from EBRD, Transition Report, 1997.

Defined as direct and portfolio investment.

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