Debt Vulnerabilities and Trends in Debt Restructurings

GIC: Sixth Annual Sovereign Debt Restructuring Conference

FEBRUARY 23, 2023

Mark Flanagan Deputy Director, Strategy Policy and Review Department International Monetary Fund

Debt

Vulnerabilities in LICs: 40 of 73 DSSI-eligible countries (55 percent) are at high risk or already in debt distress

Evolution of the Risk of Debt Distress

(in percent of DSSI-eligible countries with LIC DSAs)

 8 DSSI countries are in external arrears or in an ongoing or impending debt restructuring.

 Another 32 are at high risk of debt distress out of which 4-6 countries appear highly vulnerable to significant financing gaps emerging due to low levels of reserves and/or rising GFNs.

 Among the DSSI countries in debt distress or at high risk:

► 4 requested a debt treatment under the CF (Chad, Ethiopia, and Zambia in 2021 and Ghana recently).

► 1 (Somalia) is in a HIPC process. (NB: Sudan, while not DSSI-eligible, is also in a HIPC process.

► 1 (Malawi) has engaged a restructuring through bilateral negotiations.

► 2 (Djibouti and Lao PDR) indicated an interest to restructure/reprofile their debt bilaterally.

LICs: New challenges emerge compared to pre-HIPC era

Compared to the pre-HIPC era:  Debt stocks are not as high.

Public Debt-to-GDP Ratio in Country Subgroups (Median, percent of GDP)



evolving creditor landscape with increasing lending from non-Paris Club and private creditors poses new coordination challenges.

End-1996: Distribution of PRGT Creditors (in percent of total PPG debt stock)

End-2020: Distribution of PRGT Creditors (in percent of total PPG debt stock)

Sources: IMF Global Debt Database, IMF WEO and staff calculations

Arrears accumulation also appears to be minimal.

Outstanding Arrears (in Percent of Exports, median)

Pre-HIPC HIPC

Principal arrears, official Principal arrears, private Interest arrears, official Interest arrears, private

Source: WB IDS and staff calculations

Sources: World Bank IDS and staff calculations

However,

p25 - PRGT HIPCs (#39) High Risk/In Debt Distress LICs (#40) LICs (#69)

Debt Vulnerabilities in EMs: debt and interest payments are projected to be at pre-pandemic levels for 2023, but primary balances worsen Projections for year 2023 (in percent of GDP)

Interest Payments

Note: Charts exclude Venezuela, Lebanon and Ukraine. Red diamond indicates median value. “Boxes” indicate interquartile range.

of Countries Displayed: 79.

EMs: Medium term debt burden risks have eased but remain high

Risk assessment based on fan chart tool results

Note: Green area = Low risk (Crisis probability < 9%, Missed crisis probability = 10%). Yellow area = Moderate risk (Crisis probability >9%, <20%).

Light Pink = High risk (Crisis probability >20%, False alarm probability = 10%). Dark Pink area = Crisis probability >40%.

EM Commodity Exporters

EM Non-Commodity Exporters

EMs: GFNs remain a source of short-term risk for some of them

Gross Financing Needs (in percent of GDP)

Note: Missing value for Egypt in 2019.

Number of countries displayed: 28.

EM Commodity Exporters

EM Non-Commodity Exporters

Markets: Sovereign risk remains high for several EMs, especially noncommodity exporters, but has receded in recent months

JPMorgan EMBIG Spreads

Debt Restructuring challenges

 Official creditor coordination: Common Framework (CF): slow processes. How to do non-CF cases: Paris Club plus? Light bilateral coordination? Entirely separate? Sri Lanka a key test case.

 Official-Private coordination. First mover issues: Some official creditors want private sector to provide debt relief first, which may take longer and delay debt restructuring implementation.

 Consensus missing on key technical issues. E.g., burden sharing (the perimeter of claims to be treated; what constitutes "comparability of treatment“); and calculation of the repayment envelope.

 Information sharing: Creditors requesting full information on debt treatment and early access to information in the Fund DSA (which cannot typically be shared before Board endorsement).

 Missing instruments? Difficulty in specifying state-contingent instruments to handle uncertainty

Debt Restructuring: results and risks

Some successes, but long timelines.

CF: Chad done, some steps for Zambia. But delays in forming official creditor committees (up to 6 months) and agreeing on an MoU (12 months for Chad).

Non-CF: delays between staff level agreement with IMF and program approval (Suriname, 7 months; Sri Lanka, 5 months and ongoing; similar problems with Republic of Congo, Angola).

The optimistic view: it was to be expected that it would take time for new creditors to develop their domestic restructuring processes and to integrate into multilateral coordination processes. Learning will occur, eventually speeding up processes, and the international community is taking steps to further support the re-emergence of a consensus on technical issues (the Global Sovereign Debt Roundtable).

The risks:

 Other countries which need a debt restructuring may delay undertaking it due to process fears

 Slow overall progress continues but creditors habitually wait out each other, embedding delays 

“Too little too late problem” persists  We are not in a sovereign debt crisis, but the wrong realization of global risks events could push the global economy into such a scenario (IMF WEO risk scenario)

Thank you!