Upload
francis-long
View
215
Download
0
Tags:
Embed Size (px)
Citation preview
The Risks of Sovereign Finance
Ugo PanizzaDebt and Finance Analysis Unit
DGDSUNCTAD
http://upanizza.googlepages.com
Outline
• The risks of sovereign finance• Debt structure matters• Debt Sustainability Analysis
The risks of sovereign finance
• Two types of risk– Probability of financial or debt crisis– Constraints on the conduct of
macroeconomic policies
• Two types of policies– Domestic– International
Developing countries don’t have high levels of public debt…
Public Debt around the World (weighted averages)
0 10 20 30 40 50 60 70 80 90
East Asia
Emerging Europe
L. AM & CAR
Sub-Saharan Africa
Advanced
M. East & N. Africa
South Asia
2001–2005
1996–2000
1991–1995
Source: Authors' calculations based on Jaimovich and Panizza (2006).
Developing countries don’t have high levels of public debt…
• …and yet, they tend to have low credit ratings
• …and are the object of recurrent debt crises…
Public Debt and Sovereign Rating (1995-2005)
Italy
Jamaica
Japan
Israel
Belgium
Ghana
Jordan
Saudi Arabia
Pakistan
Egypt, Arab Rep.
Mongolia
Senegal
Morocco
Grenada
Argentina
Barbados
Bolivia
Panama
Indonesia
Bulgaria
Portugal
Cyprus
Hungary
Sweden
Philippines
Papua New Guinea
Austria
Tunisia
Malta
Denmark
Ecuador
India
Benin
CanadaFinland
Qatar
Netherlands
SpainFrance
Uruguay
Russian Federation
Venezuela, RB
United Kingdom
Peru
Croatia
Brazil
Poland
South Africa
Ireland
Malaysia
Trinidad and Tobago
United States
Iceland
Belize
Turkey
Costa Rica
Ukraine
El SalvadorColombia
Bahamas
New Zealand
Paraguay
Germany
Slovak RepublicMexico
Switzerland
Lithuania
Bahrain
Slovenia
Norway
OmanChinaThailand
Kazakhstan
Guatemala
Korea, Rep.Czech RepublicChile
Australia
Latvia
Botswana
Estonia
Luxembourg
0 10 20 30 40 50 60 70 80 90 100 110
Public Debt as Percent of GDP
Sta
nd
ard
& P
oo
r's
So
ve
reig
n R
ati
ng
AAA
B-
BB-
BBB-
A-
AA-
Source : Jaimovich and Panizza (2006) and Standard and Poor's
Investment grade
Developing countries don’t have high levels of public debt…
• …and yet tend to have low credit rating.
• …and are the object of recurrent debt crises…
• Why is it so?• Something may have to do with
debt structure rather than debt levels
Outline
• The risks of sovereign finance• Debt structure matters• Debt Sustainability Analysis
Why is Debt Structure Important
• The economics 101 debt accumulation equation states that:– CHANGE IN DEBT = DEFICIT
• Practitioners know that the real equation is:– CHANGE IN DEBT = DEFICIT+SF
• But the Stock-Flow reconciliation is often considered a residual entity of small importance
• So, the Stock-Flow reconciliation is the unexplained part of public debt
The unexplained part of public debt
0
1
2
3
4
5
6
7
8
% of GDP
IND EAP ECA MNA LAC
All ObservationsExcluding Outliers
Source: Campos, Jaimovich, and Panizza (2006)
The unexplained part of public debt
-15
-10
-5
0
5
10
15
IND SAS CAR EAP ECA MNA LAC SSA
INFLATIONGDP GROWTHUNEXPLAINED PARTINTEREST EXPENDITUREPRIMARY DEFICIT
The unexplained part of public debt
Decomposition of Debt Growth in LAC7
-12
0
12
24
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Per
cent
age
of G
DP
InflationStock flow adjustmentInterest expenditurePrimary balanceGDP growth
Source : Authors' calculations based on data from Campos, Jaimovich, and Panizza (2006).
The unexplained part of debt
• What explains the “Unexplained part of debt”– Skeletons
•Fiscal policy matters!
– Banking Crises– Defaults– Balance Sheet Effects due to debt
composition
A tale of two devaluations
Debt Management can reduce the risk of sovereign finance
Debt-to-GDP Ratio Distribution
0.2
0.3
0.4
0.5
0.6
0.7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Deb
t-to
-GD
P r
atio
Foreign currency
Foreign currency–local currency
Foreign currency–local currency–linked to GDP
The problems with foreign borrowing
• One problem has to do with the fact that foreign borrowing tend to be in foreign currency – Original sin
• Another problem is that the international interest rate is very volatile– Only a problem for EM
The International Market: Large but Volatile…
The International Market: Large but Volatile…
Will the good times last?
0
200
400
600
800
1000
1200
1400
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Predicted Spreads
Actual Spreads
Mark Twain’s quote
Outline
• The risks of sovereign finance• Debt structure matters• Debt Sustainability Analysis
What do we mean by sustainability?
• A policy stance is sustainable if a country is expected to be able to continue servicing its debt without an unrealistically large future correction to its policies (IMF, 2002, page 4).
• So, we define as sustainable a situation that satisfies the following two conditions: – A country can satisfy its current period budget
constraint without recurring to default or excessive debt monetization
– A country does not keep accumulating debt by knowing that a major future adjustment will be needed in order to be able to service its debt.
Two reasons for conducting debt sustainability analysis
• Predict potential debt crises and give policy advice in order to avoid them – Mostly for middle income countries with
market access
• Allocate concessional resources – The IMF/WB DSF for low-income
countries determines the grant element in IDA loans
• We usually focus on the change in the debt-to-GDP ratio
• The change in the debt to GDP ratio is equal to: – Interest payments– minus the growth rate of the economy– minus the primary surplus
• If you like math:
Evolution of public debt
psdgrd )(
Why are EM different
• In emerging markets we have– Large external shocks– Weak fiscal position– Non-Renewable resources– Default history – Sudden Stops
• And this leads to a much more complex debt structure which includes– Concessional debt– Liability dollarization and original sin– Volatile risk premia and interest rate
Thus, DSA becomes MUCH more complicated
• We started with:• But in EMs we have:
dr-gps )(
dsdl rrgdps (
1
11)1( fr
)
1
11)1()1(
fr
DSF for Low Income Countries
• Threshold based on debt levels and CPIA– Evaluate sustainability– Allocate IDA grants
DSF for Low Income Countries
Policies NPV of debt in percent of
EXP GDP REV
WeakCPIA<3.25
100 30 200
Medium3.75>CPIA>3.25
150 40 250
StrongCPIA>3.75
200 50 300
DSF for Low Income CountriesRisk Categories
• Low Risk (Green)– All (or most) indicators are below the burden
thresholds in both baseline and stress-testing scenarios
• Moderate (Yellow)– All (or most) indicators are below the burden
thresholds in the baseline scenario but above the thresholds in stress-testing
• High (Red)– All indicators are above thresholds in the baseline
scenario but no current payment problems
• Debt crisis– Like red but with arrears
DSF for Low Income CountriesImplications for IDA Grants
• Low Risk (Green)– Standard IDA Terms
• Moderate (Yellow)– 50% standard IDA terms and 50%
grant
• High (Red)– 100% grant
DSF for Low Income Countries
• Do these thresholds make sense?– Weak econometric exercise– Broad groups
• Does the CPIA make sense?– Politics may play a role– Used for too many purposes
Want to learn more?
• UNCTAD E-course on Debt Sustainability Analysis
The Risks of Sovereign Finance
Ugo PanizzaDebt and Finance Analysis Unit
DGDSUNCTAD
http://upanizza.googlepages.com