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Maintaining debt sustainability and improving debt sustainability assessments

The global debt situation

Global gross debt of the non-financial sector reached a record $152 trillion, or 225 per cent of World Gross Product, in 2015 (see IMF Fiscal Monitor, October 2016), two thirds of which are liabilities by the private sector. Such debt levels can carry risks for economic growth prospects and financial stability. One of the triggers of the global financial and economic crisis in 2007-2008 was the build-up of excessive debt and leverage in the private financial sector in many advanced econo¬mies. The risks emanating from global debt and leveraging are still present in the global economy, particularly in developed and some emerging market economies, as global debt levels have reached an all-time high.

External debt of developing countries

Average external debt-to-GDP ratios declined significantly in developing countries since the early 2000s. The Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) (see section on HIPC for more details), along with economic growth, have helped resolve debt overhang in many (i) low-income and lower-middle income countries eligible for concessional financing (such as from the IMF’s Poverty Reduction and Growth Trust (PRGT) and the World Bank Group’s International Development Association), and (ii) the least developed countries (LDCs) (31 out of 48 LDCs were eligible for HIPC). Middle-income countries’ borrowing on non-concessional terms also benefited from low interest rates and pre-payment by some emerging markets.

Changing composition of debt

External borrowing by the private sector in developing countries has increased over the last decade. While such debt is a responsibility of the private sector, recent experiences in both developed and developing countries have shown that excessive private borrowing can have systemic consequences and ultimately impact financial stability and debt sustainability in a country. Private external debt remains concentrated in a small number of upper middle income countries (notably, there was a surge in corporate debt in some emerging market economies), but external private sector borrowing has also increased in LICs and LDCs in recent years.

Public debt

Public debt, while on average on a downward path for most of the past decade, has recently started to tick up in the context of a changing financing landscape. A recent IMF-WB report found that debt relief programs, strong growth, and high demand for commodities drove the average debt-to-GDP ratio down since 2006 in a sample of 74 countries that are eligible to use the IMF’s concessional resources under the Poverty Reduction and Growth Trust (PRGT). However, with debt relief programs largely over, the continuing need to finance priority projects, and a more challenging external environment, the average debt ratio has risen modestly and was at 50 percent of GDP by 2015, a level broadly similar to those in 2007 (Figure 7). This development has been accompanied by an increased use of non-concessional financing, reflecting expanded use by some countries of domestic financing, international capital markets, and non-concessional bilateral financing. 

Countries at risk of debt distress

Following a significant net improvement in ratings on risk of debt distress since 2007, the Low-income country debt sustainability framework (LIC DSF) has recently started to show deterioration for some countries (Figure 9). Ratings reached their most favourable point in 2013 with only 24 percent of countries eligible to use the IMF’s concessional resources under the Poverty Reduction and Growth Trust rated as facing high risk of debt distress, down from 43 percent in 2007. In the past three years, however, there has been a net deterioration in risk ratings, with relatively more downgrades than upgrades. The downgrades generally reflect less favourable external conditions and inadequate fiscal discipline, and underline the importance of cautious macroeconomic management.

Review of the debt sustainability framework for LICs
The debt sustainability framework for LICs (LIC DSF) is currently being reviewed by staff from the IMF and the World Bank. The LIC DSF assesses the risk of external debt distress of PRGT-eligible countries, taking into account several external public debt burden indicators, as well as the quality of borrower countries’ governance. It plays an important role in the international financing architecture – beyond its core role of early warning of potential debt distress, it determines countries’ eligibility for and terms of concessional financing, and is a key input for the application of the IMF debt limits policy, among others.