Abstract

Public debt in emerging market countries differs in several respects from that in advanced economies. First, average debt levels were traditionally equivalent to a lower share of GDP in emerging market countries than they were in advanced economies; the gap has closed in recent years, partly as a result of reductions in the debt of advanced economies (Figure 1). Second, reliance on externally issued debt has been far greater in emerging market countries than in advanced economies. Third, while the structure of external debt of emerging market countries is similar to that of advanced economies, the structure of their domestic debt—in terms of maturity, currency composition, and the prevalence of indexed debt—is very different.1

Public debt in emerging market countries differs in several respects from that in advanced economies. First, average debt levels were traditionally equivalent to a lower share of GDP in emerging market countries than they were in advanced economies; the gap has closed in recent years, partly as a result of reductions in the debt of advanced economies (Figure 1). Second, reliance on externally issued debt has been far greater in emerging market countries than in advanced economies. Third, while the structure of external debt of emerging market countries is similar to that of advanced economies, the structure of their domestic debt—in terms of maturity, currency composition, and the prevalence of indexed debt—is very different.1

Figure 1.
Figure 1.

Advanced Economies and Emerging Market Countries: Public Debt Stocks and Debt Composition

(In percent of GDP)

Sources: IMF, World Economic Outlook (September 2003); and IMF staff estimates.1Argentina, Brazil, Chile, China, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, Thailand, Turkey, and Venezuela.2Countries listed in footnote 1 above plus Bulgaria, Colombia, Costa Rica, Côte d’Ivoire, Croatia, Ecuador, Egypt, Jordan, Lebanon, Morocco, Nigeria, Pakistan, Panama, Peru, Ukraine, and Uruguay.3Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, United Kingdom, and United States.

The remainder of the section reviews such differences in greater detail, first, by considering external and domestic debt separately and, second, by offering a consolidated view.

Public Debt in Emerging Market Countries Versus Advanced Economies

Structure of International Debt

The international sovereign debt of emerging market countries consists mainly of medium-term and long-term fixed-interest-rate bonds denominated in foreign currency. Bank loans used to be the main form of financing during the 1970s and 1980s. A stock conversion of loans into bonds took place through the Brady deals; this helps explain the drop in loans, and rise in bonds, in the early 1990s (Figure 2, first panel). When developing countries re-entered international credit markets in the 1990s, they did so mainly through bond issues (Figure 2, second panel). The prevalence of bond financing is not unique to emerging market countries: its relative importance has grown even more sharply in advanced economies, where virtually all international borrowing is through bonds.

Figure 2.
Figure 2.

Structure of External Public Debt in Emerging Market Countries

(In billions of U.S. dollars)

Sources: World Bank, Global Development Finance (2003); Capital Data, Bondware and Loanware.

Most internationally issued public debt carries a fixed interest rate—for both advanced economies and emerging market countries. Much of the emerging market debt issued in the 1970s and 1980s had a floating rate. Certain types of Brady bonds also had a floating rate, and the proportion of floating-rate bonds was relatively high until the mid-1990s: in 1994, about 40 percent of JPMorgan’s Emerging Markets Bond Index Global (EMBIG) carried a floating rate. As new bond issues began to take off in the mid-1990s and emerging markets moved from bank loans to bond financing; they also moved from floating-rate to fixed-rate instruments (Figure 3). Currently, floating-rate bonds make up less than 5 percent of the EMBIG.

Figure 3.
Figure 3.

Emerging Market Countries: Fixed- Versus Floating-Rate Sovereign Bond Issues

(In billions of U.S. dollars)

Source: Capital Data, Bondware and Loanware.

Most international sovereign debt of emerging market countries is issued at medium-term (5–10 years) or longer-term maturities. However, the average maturity of emerging market countries’ debt has declined in recent years, and is now lower than for advanced economies. The share of the EMBIG consisting of debt with remaining maturities over 20 years declined from 40 percent in the mid-1990s to about 20 percent by the end of 1999, and has stabilized since then (Figure 4, top panel). The decline stems from two factors. First, the 30-year bonds issued through the Brady deals are gradually becoming less important in the stock of emerging market countries’ debt as new debt is issued. Second, excluding the Brady bonds, the average maturity of new emerging market countries’ bond and loan issues is significantly lower than for advanced economies, and has declined substantially over the past two decades (Figure 4, bottom panel).2

Figure 4.
Figure 4.

Structure of Internationally Issued Debt: Maturity Composition

Sources: JPMorgan, Emerging Market Bond Index Global (EMBIG); Capital Data, Bondware and Loanware.1Percentages in first three years do not add up to 100 because of instruments with unknown remaining maturity.

Most sovereign debt issued internationally by both emerging market countries and advanced economies is in foreign currency (Table 1). Only a handful of advanced economies issue a substantial share of their international sovereign debt in their own currency. This does not imply that governments in emerging market countries and advanced economies face the same constraints in the international debt market. Indeed, some advanced economies issue local-currency debt in their home markets and attract international investors to purchase it there.

Table 1.

External Sovereign Debt: Currency Composition, 1980–20031

(Unweighted average, in percent)

article image
Source: IMF, Bonds, Equities and Loans database.

All bond and loan issues, 1980–2003.

Argentina, Brazil, Chile, China, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, Thailand, Turkey, and Venezuela.

Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, United Kingdom, and United States.

Includes euro issues (but not European currency unit issues) for European Monetary Union member countries.

Prior to the introduction of the euro.

Includes Italian lira, British pound, French franc, and Swiss franc.

Structure of Domestic Debt

The composition of government debt issued on the domestic market is much more heterogeneous across countries than is the composition of debt issued internationally. While there are differences between emerging market countries and advanced economies, these are overwhelmed by differences among emerging markets. On average, emerging market countries rely on long-term local-currency debt to a lesser extent than do advanced economies, but there is substantial variation among emerging markets: such debt is virtually absent in Latin American countries, but represents more than one-half of total debt for several countries in emerging Asia and emerging Europe (Table 2).

Table 2.

Structure of Domestically Issued Government Bonds at End-2001

(In percent of total)

article image
Sources: IMF staff estimates; and JPMorgan, Guide to Local Markets (2002).

Short term is defined as an initial maturity of less than one year, and long term is defined as an initial maturity of more than one year.

For Chile, the shares refer to bonds issued by the central bank. The amount of bonds issued domestically by the central government is negligible.

More generally, emerging market countries display remarkable differences in terms of the breakdown of domestic government bonds into five categories: local-currency long-term fixed-rate, local-currency short-term fixed-rate, floating-rate (indexed to a domestic rate), inflation-indexed, and foreign-currency. Each of the first four categories represents more than one-half of total debt in at least one country. There is also significant heterogeneity within regions. In Asia, for example, some issuers (Indonesia and Malaysia) do not make use of long-term local-currency debt whereas other issuers (India, Taiwan Province of China) rely almost exclusively on this form of debt. In Latin America, some countries (Venezuela) borrow mainly through interest-rate-indexed debt, whereas in others (Chile) the majority of government debt is indexed to inflation.

A Consolidated View

Domestic and international debt markets are substitute sources of finance and should be considered jointly. International and domestic debt markets have become integrated, with residents and nonresidents being active in both. For example, in both Argentina and Uruguay, more than half of the international debt was held by residents. Conversely, foreign residents held more than 80 percent of Mexican domestically issued Tesobonos and Cetes before the 1994 crisis (IMF, 1995) and a large share of Russian GKOs and OFZs issued before the 1998 crisis (about 30 percent, according to IMF staff estimates). Sovereigns seem able to choose whether to tap international debt markets or domestic debt markets. In addition to market conditions, this choice depends on two sets of considerations. First, domestic public debt is likely to crowd out financing to the domestic private sector, because some firms may be constrained to the domestic credit market owing to high costs of borrowing abroad. Second, international investors are less protected in domestic jurisdictions.

Obtaining an integrated picture of debt structure that includes both domestic and international debt is difficult owing to data limitations, especially for domestic debt. Since the 1994 Mexican crisis, the international community has made an effort to improve the availability of cross-country statistics.3 This effort has focused primarily on external debt, in spite of the important role played by domestic debt in several recent emerging market crises (Mexico in 1994; Russia in 1998; and Brazil in 1998). Nevertheless, it is possible to establish some basic stylized facts on total (domestic plus international) government debt.

Although advanced economies have traditionally relied on domestic debt markets to a greater extent than have emerging market countries, there seems to have been some convergence in this regard in recent years (Figure 5). The domestically issued component of total public debt has increased at a quicker pace than the foreign component in emerging market countries, especially in the 1990s. This may reflect development of the domestic markets, though the increase in total debt also mirrors fiscal expansions.

Figure 5.
Figure 5.

Emerging Market Countries: Structure of Public Debt

(In percent of GDP)

Source: IMF staff estimates.

Nevertheless, much of the increase in domestically issued debt has continued to take the form of foreign-currency debt and short-term debt. The differences between advanced economies and emerging market countries in this respect have thus persisted (Table 3). Consolidating international and domestic debt, about 47 percent of central government debt in emerging market countries was denominated in (or indexed to) a foreign currency in 2001, against about 5 percent for advanced economies. Long-term local-currency debt represented 76 percent of total debt in advanced countries, 36 percent of total debt in emerging market countries, and 15 percent of total debt in Latin America. While inflation-indexed public debt issues have been at the forefront of the development of domestic debt markets in a few countries, foreign-currency issues have been key in most others.

Table 3.

Structure of Total (Domestic and External) Central Government Debt, 2001

(In percent of total)

article image
Sources: IMF staff; OECD, Central Government Debt Yearbook 1992–2001; and websites of the country authorities.

In percent of total central government debt for emerging market countries and total central government marketable debt for advanced economies.

Includes debt held by the Central Bank.

Based on residual maturity.

Only marketable domestic-currency bonds.

Consolidated government debt.

Includes debt indexed to inflation and domestic interest rates.

Includes debt owed to National Small Savings Funds.

Includes debt with maturities of three years or more.

Data for 2002.

Sovereign Versus Corporate Liability Structures

Moving to a comparison between sovereigns and corporates, the richer liability structure of corporates is apparent along three dimensions. First, and by far the most striking, a large share of corporate liabilities consists of outside equity.4 Moreover, corporates make use of financial instruments that combine debt and equity, such as convertible bonds—the holder can convert these bonds into stocks at a predetermined exchange ratio at prespecified dates. In contrast, sovereigns lack not only equity but also equity-like instruments that would make returns a direct function of variables such as tax revenues, the fiscal balance, or GDP.5 Second, corporations make extensive use of collateralized (secured) debt as well as seniority distinctions within unsecured debt. In contrast, sovereigns issue comparatively little secured debt, and unsecured debt is not formally prioritized. Third, corporate bond contracts sometimes include covenants that place restrictions on future financing decisions of the firm, by placing limits on total indebtedness, or restricting the issuance of debt at the same or higher levels of seniority. No such restrictions exist at the sovereign level, at least in debt contracts with private creditors.6

Use of Secured and Subordinated Debt

Corporations in advanced economies typically issue liabilities belonging to several classes with different priority in the event of liquidation or bankruptcy reorganization. These include secured debt,7 ordinary unsecured debt, subordinated debt, preferred stock, and common stock. Secured debt gives the title to a pledged asset to the debtor. The remaining liability classes define an absolute priority ranking: in the event of liquidation, each of them is to be repaid only if the higher ranking class was repaid in full.8 Both secured and subordinated debt make up significant portions of the corporate debt stock.9

In contrast, sovereign liabilities generally fall into just two classes—secured debt and unsecured debt. Within the unsecured debt class, there is no distinction between ordinary debt and subordinated debt. Secured sovereign claims are generally collateralized by future receipts, such as oil revenue or other export receivables (Chalk, 2002; and IMF, 2003d). To serve as collateral, future receipts need to be removed from the direct control of the sovereign, that is, the transactions associated with future receipts need to occur under foreign jurisdiction. For this reason, collateralized future receipts typically involve export revenues accruing to the government (usually through a public enterprise), rather than domestic tax revenues.

Secured debt is a far smaller proportion of total debt for sovereigns than it is for corporations. Of the 79 developing and emerging market countries that had at least one public sector (including public enterprises) international loan or bond outstanding on January 1, 2003, about half (39 countries) owed collateralized loans or bonds. However, the face value of collateralized debt was only 6.2 percent of the face value of total debt outstanding (7.1 percent in the group of countries that had some collateralized debt). The share of collateralized loans or bonds in total loans and bonds was higher than 25 percent in only 9 countries. In the postwar era, secured sovereign debt is a relatively recent phenomenon: the first modern collateralized bond was issued by Mexico in 1988 (Figure 6).10

Figure 6.
Figure 6.

All Developing Countries: Public Sector Bonds and Loans Issued in International Markets1

(Total issues, in billions of US. dollars)

Source: Capital Data, Bondware and Loanware.1Developing countries defined to include emerging markets. Bonds and Loans issued by sovereigns and public sector enterprises, excluding project financing.

Financing Restrictions in Debt Contracts

Corporate bond contracts in the United States have often contained “negative covenants” that restrict future financing decisions (Smith and Warner, 1979; Asquith and Wizman, 1990; and Goyal, 2003). These include clauses that place restrictions on net worth or total debt, possibly excepting subordinated debt. These clauses protect creditors from dilution through additional debt issued in the same seniority class (see Section IV). Creditor protections of this type—in particular, restrictions on future debt issues—are generally absent from sovereign debt.11

Some elements of IFI conditionality could be interpreted as analogous to negative covenants, in the sense that—among other purposes—they serve to protect the financial interests of IFI creditors by restricting the borrower’s financing decisions (e.g., by limiting the fiscal deficit or placing limits on external debt). Analogous conditions or covenants do not exist in privately held debt.

Note: The authors of this section are Marcos Chamon, Olivier Jeanne, and Jeromin Zettelmeyer.

1

In this paper, “external” (or “international”) and “domestic” refer to the jurisdiction where the debt is issued.

2

Certain types of short-term debt that have been widely cited as a source of fragility in some recent crises, such as the Mexican Tesobonos in 1994 and the Russian GKOs in 1998, were issued domestically and, hence, were not international debt in the sense used here.

4

In a sample of 5,000 U.S. industrial corporations surveyed by Barclay and Smith (1995), the average ratio between debt and common stock was about 1 in 3, that is, common stock made up about 75 percent of total firm value on average.

5

Informally speaking, a country’s currency might be viewed as having a few of the features of equity. Investors holding currency, or other local-currency-denominated assets, share in the fortunes of the issuing country: as the real exchange rate is correlated with economic performance, real returns tend to be higher when the country’s economic growth is relatively strong.

6

IMF programs typically restrict total nonconcessional debt (see below in this section).

7

Including capital leases, in which the contract promises a fixed payments stream, and the leased capital asset can be seized (repossessed) by the creditor in the event of default.

8

In U.S. bankruptcy reorganizations under Chapter 11, absolute priority is frequently violated: equity holders often receive securities of positive market value even though some debt holders are not fully repaid (Franks and Torous, 1989; Weiss, 1990). However, deviations from absolute priority among debt holders seem to be rare.

9

Secured debt constituted 53 percent of the debt of the average U.S. industrial firm (38 percent if leases are excluded), ordinary debt 35 percent, and subordinated debt 12 percent (Barclay and Smith, 1995). Large firms tend to issue more ordinary and subordinated debt, whereas smaller firms tend to issue more secured debt. About 75 percent of firms issued liabilities in at least three priority classes, that is, common stock plus at least two debt classes (or preferred stock and at least one debt class). The results are similar for the United Kingdom (Lasfer, 1999).

10

Sovereigns made greater use of collateralized bonds in the pre–World War I era. Collateral usually took the form of infrastructure (especially railways), raw materials, or, especially when bonds were issued following a debt restructuring, tax revenues (Mauro and Yafeh, 2003).

11

The main exception is the “negative pledge clause” in sovereign bond contracts and official debt, which prohibits new collateralized debt unless the incumbent debt holders are given an equal claim on the collateral.

  • View in gallery

    Advanced Economies and Emerging Market Countries: Public Debt Stocks and Debt Composition

    (In percent of GDP)

  • View in gallery

    Structure of External Public Debt in Emerging Market Countries

    (In billions of U.S. dollars)

  • View in gallery

    Emerging Market Countries: Fixed- Versus Floating-Rate Sovereign Bond Issues

    (In billions of U.S. dollars)

  • View in gallery

    Structure of Internationally Issued Debt: Maturity Composition

  • View in gallery

    Emerging Market Countries: Structure of Public Debt

    (In percent of GDP)

  • View in gallery

    All Developing Countries: Public Sector Bonds and Loans Issued in International Markets1

    (Total issues, in billions of US. dollars)

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