DEBT SUSTAINABILITY IN EMERGING MARKET ECONOMIES Yilmaz Aky

1
DEBT SUSTAINABILITY INEMERGING MARKET
ECONOMIESYilmaz Akyüz

• So far focus on LICs. Debt seen as an external
  transfer problem. Fiscal dimension an
  afterthought.
• Now greater attention to EMs and to both
  fiscal and external sustainability but more on
  FS than on ES.
• Public debt no longer consists of external
  debt. Domestic debt is a growing part of total
  public debt.
• Private external debt is a rising proportion
  of total external debt.

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Theoretical Notion of Sustainability

• Solvency present value budget constraint
• Problems
• No specific constraints over debt and deficits at
  any point in time.
• Uncertainty Key parameters are non-
  stationary

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The Standard Framework Debt Stabilization

• Conditions for public debt stabilization
• Problems with thresholds more serious than HIPC
  because of unstable lender behaviour
• ES Same framework. Transfer of resources
• Evolution of external and public debt in the
  course of development

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Shortcomings

• Neglect of endogeneities and feedbacks
• Treatment of key parameters as if they are
  independent growth, fiscal and current account
  balances, debt levels, risk premium and interest
  rates, exchange rates.
• Neglect of cumulative interactions vicious and
  virtuous circles.

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Neglect of links between FS and ES

• FS an internal transfer problem only?
• No distinction between domestic and external
  debt neglect of forex constraints
• But external imbalances and BOP crises alter key
  parameters effecting FS.
• Socialization of private debt

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• ES An external transfer problem?
• Public and private surpluses
• Importance of the division of external debt
  between public and private sectors
• Internal transfer problems leading to BOP
  difficulties LA in the 1980s.

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Trade offs Between FS and ES

• Asymmetric effects of growth and exchange rate
  shocks on budget and current account
• Conditions favouring FS but causing external
  fragility and vice versa.

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The Funds Approach

• Standard framework same shortcomings.
• FS
• Stabilization of the debt ratio, no threshold
• Baseline scenarios debt projections
• Stress tests
• ES
• BOP and external projections
• 40 threshold, used with discretion.

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Optimistic Projections

• Invariably projects falling debt ratios more
  optimistic for external than public debt
• Misses by large margins
• Greater optimism for countries with Fund programs

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Optimistic

• Optimism about private investment and growth?
  misses fiscal targets ? misses debt projections.
• Stress tests almost meaningless translates
  falling to stable debt ratios.
• Early warnings cannot predict if simulated
  shocks could actually occur or lead to crises.
• Analytical difficulties yes.
• But also faults in economic thinking. Too much
  confidence in the policies promoted.

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Capital Flows and Sustainability

• Still believes in Lawson Doctrine? Little
  attention to external imbalances if driven by
  free capital flows and floating.
• Lessons Debt crises often follow currency
  crises. Need to check surges in arbitrage inflows
  and external fragility.
• IMF aversion to control over inflows even when
  monetary policy is powerless to stabilize the
  currency.
• Has the Fund really learned on capital account
  issues? Is there a new paradigm, as claimed by
  the IEO?
• Policy advice. Turkey versus Argentina and
  Thailand.

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Current Vulnerabilities

• Favourable global conditions. Debt ratio fell by
  8.
• Currency appreciations contributed 6.
• Significant fiscal savings from low
  spreads/rates.
• Strong commodity prices and growth added to
  revenues.
• Liquidity and risk appetite more important than
  fundamentals.
• And the debt ratio is still 60 far above
  estimates of safe debt, including by the IMF
  itself.

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Public Debt and Fiscal Space

• Fiscal policy has not been serving growth and
  development.
• First price stabilization, now debt stabilization
• Burden fell on investment from 8-10 to 4-5 of
  GDP
• Large infrastructure gaps, reducing potential
  growth
• Interest payments almost twice the share of
  investment
• Public debt distorting income distribution
  regressive taxation, concentrated debt holdings

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How to Generate Fiscal Space?

• BWIs fiscal space is what is left after
  servicing debt.
• Raise efficiency and revenues, attract grants,
  borrow more
• Debt relief is not an option unless granted by
  creditors.
• IMF aversion to restructuring. Primacy of debt
  service
• Why then promote CACs?
• UN approach sustain and service debt subject to
  MDGs.
• US Chapter 9 Primacy of social objectives over
  debt

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Debt Workouts Options and Constraints

• Domestic debt Keynes solution
• Official debt Evian approach more promises.
• Commercial debt Orderly sovereign debt workouts
  not again?