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)| false “ Calvo, Guillermo, Capital Flows and Macroeconomic Management: Tequila Lessons”, in International Journal of Finance and Economics, Vol. 1, Number 3, July 1996( Paper delivered at a conference on the ‘Implications of International Capital Flows for Macroeconomic and Financial Policies’, IMF, Washington, D.C., December 12-13, 1995).
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The authors gratefully acknowledge a substantial contribution from Jonathan Dunn. Comments are acknowledged from Julian Berengaut, Pierre Dhonte, Donal Donovan, Leif Hansen, Kornelia Krajnyak, Subir Lall, Henri Lorie, Jorge Márquez-Ruarte, John Odling-Smee, David Owen, Sanjaya Panth, Anthony Richards, and Tom Wolf. Generous research assistance was provided by Alex Keenan and Anna Unigovskaya.
To start with, the data on debt obligations in 1992 are sparse and unreliable for most B-CIS countries, in part because intra-CIS obligations are generally not treated in a comprehensive or consistent manner; there are also other definitional problems with data in later years. These statistical difficulties are compounded by “guarantees” given by individual government ministries to enterprises (in 1992-93) enabling them to borrow abroad, which subsequently led to sizable budgetary payments on called–in loans and limitations on such practices in some B-CIS states.
Under the “zero-option” agreement, Russia assumed all the external assets and liabilities of the USSR, although not all CIS states have so far ratified this agreement.
Strictly speaking, this is not completely accurate since monetary obligations to the Central Bank of Russia resulting from the net position in the correspondent accounts of ruble area central banks were converted into government debt to Russia for most countries, usually at the time of their departure from the ruble area.
Defined as the sum of the current account (excluding grants), amortization, reduction in arrears, gross capital outflows, negative errors and omissions, and increase in official reserves.
In April 1996, the Paris Club agreement with Russia covered US$39 billion in debt to be repaid over 25 years with a six-year grace period. As a result, Russia’s debt servicing obligations to official creditors in 1996 were reduced from US$8.5 billion to US$2 billion.
As a percent of the country’s quota, the Fund’s exposure at end-1996 ranged from 202 percent in Russia to 25 percent in Tajikistan; Turkmenistan is the only one among the B-CIS countries which has not received any financial support from the IMF to date (Table 5).
These operations further complicate the availability of comparable data on outstanding debt and debt service for a number of CIS states. Moreover, in some cases bilateral debt issues with Russia are still not fully settled.
It is worth noting that if the stock of domestic debt is added to external debt, the ratios of total debt to GDP in 1996 rise by around 12 percent of GDP for the Kyrgyz Republic and Russia, and by 5–10 percent for Belarus, Georgia, Latvia, Moldova, Tajikistan, Ukraine, and Uzbekistan. In general, the ranking of the B-CIS countries’ by debt burden is not materially influenced by adding internal debt (Figure 4).
The debt/GDP ratio for developing countries as a whole declined from 38 percent in 1992 to 32 percent in 1996 (and an estimated 30 percent in 1997), while the transition countries’ ratio fell from 59 percent in 1992 to 26 percent in 1996 (and an estimated 21 percent in 1997); IMF, World Economic Outlook, May 1997. It has been argued that a “warning” threshold of 40 percent of GDP for external debt can be justified based on the historical experience which shows that countries exceeding this level have run into debt problems (Cline, 1995).
The World Bank defines a “moderately indebted country” as one that has a debt/exports ratio in excess of 132 percent. In general, the debt/exports ratio has some significant drawbacks: first, in any one year it tends to be more volatile than the debt/GDP ratio since export earnings can fluctuate sharply; second, in transition countries the high levels of managed trade and barter makes the ratio weaker as an objective indicator of the debt burden.
At the same time, export earnings have been rising at a rapid pace (Table 10). In the early years of transition, traded goods prices can rise to world levels rather rapidly which may lead to increasing export earnings but without any assurance that this process of improving terms-of-trade will continue.
In Russia, at least three city governments and ten regional authorities are preparing to issue eurobonds in the near future; Agence France-Presse, May 8, 1997.
These countries are likely to include Armenia, Georgia, the Kyrgyz Republic, and Tajikistan.
In the absence of appropriate macroeconomic policies, a substantial natural-resource endowment—in hydrocarbons, for example—has seldom protected a country from an external debt crisis or serious liquidity problems (e.g. Mexico, Nigeria, Indonesia, Venezuela); in fact, the presence of vast natural resources has, on several occasions, resulted in an excessive dependence on easily available external financing and postponed economic adjustment.
A rough idea of the relative scale of market borrowing by the B-CIS countries can be gathered from the size of their gross liabilities to BIS Reporting Area banks in 1996, US$55 billion, compared to the total liabilities of all developing countries, US$763 billion. International Banking and Financial Market Developments, Bank for International Settlements, Basle.
One of the reasons for concern about the relatively high current account deficits is that, at least so far, they have been financed by a very low level of non-debt creating capital flows; as Table 2 shows, although rising fast, direct investment has represented only 5 percent of total external financing to the B-CIS states during 1993–96.
The city of Moscow has just issued Russia’s first non-sovereign bond on international capital markets. Commenting on this development, analysts noted that this eurobond “will probably perform better than the Russian eurodollar bond [since] Moscow has a much healthier budget situation than the Russian government and other large cities....” The Financial Times, May 6, and June 2, 1997.
It is desirable to calculate the public debt-service to revenue ratio at each level of government in order to expose fully potential debt servicing difficulties, e.g., a default on external debt by (for example) local governments would probably impose significant externalities—including higher borrowing costs—on other potential borrowers. Due to limited information, this paper only provides aggregate figures for each B-CIS country.
For the B-CIS countries, the median revenue/GDP ratio declined from 36 percent in 1993 to 24 percent in 1996; the median expenditure/GDP ratio fell from 42 percent to 31 percent over the same period.
For example, in Turkmenistan where virtually all reported external debt is contracted by public enterprises, and carries either an explicit or implicit government guarantee, the ratio of total external debt service to government revenue increased from 23 percent in 1995 to 78 percent in 1996.
Which would, of course, raise serious moral hazard issues.
Loans undertaken for consumption purposes may still result in increased welfare as long as the existing stock of net liabilities is matched, in terms of present discounted value, by a stream of future primary surpluses; of course, “the need to maintain intertemporal solvency” can be applied equally to the government budget as to the country’s external position (Buiter, Lago and Stern, 1997).
Kazakstan is likely to borrow US$280 million through a dollar-denominated eurobond issue this year to help pay off government budget debts to pensioners; Reuters, May 6, 1997.
It has been argued that in Russia the difficulties in collecting taxes result in both domestic savings and foreign capital going excessively to meet the government borrowing requirement which, in turn, keeps working capital scarce and investment finance even more so (Leijonhufvud and Ruhl, 1997). This crowding-out problem, of course, is not unique to Russia and exists in several CIS countries.
In some countries, sizable borrowing on international capital markets by state enterprises specifically with a view to making tax payments to the budget is a symptom of structural problems with the tax administration system as well as partitioned domestic capital markets. Such non-sovereign borrowing does, of course, imply an ultimate sovereign liability and it postpones the needed structural changes for both the enterprise and the state.
In a prudent move, the Russian government has recently announced that regional or local governments receiving transfers or subsidies from the federal budget will not be allowed to borrow directly on international capital markets.
To an important extent, for some years to come the ability of B-CIS sovereign borrowers to raise substantial financing on international capital markets on acceptable terms will also continue to depend upon the existence of appropriate and credible macroeconomic policies supported by the Fund, whether or not the Fund provides its own financial support through an adjustment program. The establishment of an independent track record on the markets by the B-CIS countries will invariably take time. Moreover, in other regions experience has shown that the “conditionality” applied through market decisions can be broader and harsher (or, to put it another way, less forgiving) than official conditionality.
There is no a priori reason to suppose that, as far as the judgements of capital markets are concerned, the B-CIS countries will be less susceptible to contagion effects than borrowers in other regions in recent years.
The combination which causes concern is the prevalence of high current account deficits in an environment where the Lawson thesis is not likely to be valid owing to a blurring of the distinction between private and public savings-investment balances in most transition economies, i.e. relatively low fiscal deficits do not imply that current account deficits resulting “purely” from private sector imbalances will be self-correcting through movements in real interest rates.