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Maintaining debt sustainability and improving debt sustainability assessments

The global debt situation

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 economies. The risks emanating from global debt and leveraging are still present in the global economy, particularly in developed and some emerging market economies. However, the cyclical upturn of the global economy in 2017-2018, as well as continued monetary policy support and regulatory enhancements, have led to a decline in global near-term financial stability risks (see Global Financial Stability Report October 2017). Nevertheless, this generally benign global environment masks increased debt risks and vulnerabilities in both developing and developed countries, particularly as monetary policy normalization continues and interest rates rise in global markets.

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First, leverage continues to rise in the private nonfinancial sector in both developed and developing countries. Private sector debt—one of the triggers for the 2008 crisis—has continued to increase in the aggregate, with deleveraging uneven across sectors and countries. Second, the search for yield in global markets has allowed several developing countries to return to markets and issue sovereign bonds in 2017, leaving them vulnerable to debt rollover and interest rate risks, especially in the context of rising global interest rates.  Third, commodity prices remain low (see Report of the Secretary-General A/72/253), are only slowly recovering, and thus continue to weigh on balance sheets in commodity-exporting economies. A renewed downturn in commodity prices would leave these economies vulnerable to fiscal and corporate debt risks.

External debt of developing countries

Despite a more favorable global economic outlook, emerging debt challenges in developing countries have intensified. Debt-service indicators among developing countries have deteriorated in a widespread manner, and vulnerabilities have increased across developing countries, in particular in several countries that previously benefitted from debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDRI) initiatives. Many natural-resource-producing countries have seen rapid debt accumulation as Governments have attempted to cushion the shock from falling commodity prices. Strains are also evident in several countries experiencing conflicts or political unrest, and in some small island developing States (SIDS), which remain vulnerable to natural disasters. Consequently, there is no reason for complacency about the stock of developing-country external debt.

Changing composition of debt

Many developing countries, including least developed countries (LDCs), have increasingly tapped international financial markets to raise resources. The share of private creditors in public and publicly guaranteed debt has doubled in LDCs, from 8 to 16 per cent of total external public debt, and increased from around 41 to 61 per cent in all developing countries.

SDG expenditures and debt sustainability

The relationship between the Sustainable Development Goals (SDGs) and debt sustainability is explored in ongoing research by the United Nations Conference on Trade and Development (UNCTAD) which estimates the cost to government budgets of achieving SDGs 1-4 by 2030 for a sample low-income, middle-income and upper-middle-income country. The UNCTAD SDG model projects the evolution of general government gross public debt if the additional cost is covered by borrowing on commercial terms, on concessional terms or with grant financing covering half the borrowing requirement. These alternative scenarios are compared to a baseline business-as-usual scenario in which government expenditure and public debt follow current trends.

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The SDG scenario shows that the increase in public debt is likely to be unsustainable in all three cases if additional expenditures are fully funded through debt issuance on commercial terms. If external grants cover 50 per cent of the additional fiscal expenditures, the growth of debt would be more manageable, but still high and likely unsustainable in all three cases.

The resource gap to fully fund the eradication of extreme poverty and hunger and provide quality education and universal health care, while simultaneously stabilizing public debt levels, is significant. Progress in domestic resource mobilization, improved resource allocation in national budgets, and efficient public debt management would help to reduce the gap. The model shows, however, that such improvements would clearly be insufficient on their own, and that the SDGs cannot realistically be financed fully on commercial terms. In the light of large investment needs related to the 2030 Agenda for Sustainable Development, the SDGs will not be achieved without substantial support from the international community for what are essentially high-return investments in international prosperity and development.

For more information on SDG investments and debt sustainability, please see here.

Countries at risk of debt distress

Many countries exceed threshold indicators jointly developed by the IMF and the World Bank for analyses of low-income-country debt sustainability. Eighteen low-income developing countries were judged by the IMF and the World Bank to have high risk or already be in a state of debt distress and ratings have been broadly deteriorating. As of end-2017, eight countries have seen their rating downgraded relative to 2013, with only three upgrades. Fragile States, African post-HIPC countries, and commodity exporters were most likely to have a weaker debt assessment. Risks in SIDS also remain high, due in large part to their susceptibility to natural disasters.

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Source: IMF (LIC DSF database).


Review of the debt sustainability framework for LICs

Achieving debt sustainability is a major responsibility of the upstream side of sovereign debt management. The IMF and World Bank developed the debt sustainability framework for low-income countries (LIC DSF) to support this aim. Following an extensive review, and responding to changes in the debt landscape noted above, the IMF and the World Bank Executive Boards approved comprehensive reforms to the LIC DSF in September 2017.