Info Service on Finance and Development (Nov18/02)
13 November 2018
Third World Network
Rising debt in developing countries becoming a formidable obstacle
Published in SUNS #8793 dated 12 November 2018
Geneva, 9 Nov (Kanaga Raja) - Rising debt and financial vulnerabilities
in the developing world are fast turning into a formidable obstacle
for sustainable development in general, and for the implementation
of the 2030 Agenda for Sustainable Development in particular, the
UN Conference on Trade and Development (UNCTAD) has said.
This assessment is in an UNCTAD Secretariat Note prepared for the
second session of the Intergovernmental Group of Experts (IGE) on
Financing for Development taking place here from 7-9 November.
According to UNCTAD, amelioration of debt and financial distress requires
that the causes be addressed.
Policy and regulatory measures that help reduce international capital
flow volatility and ensure that external finance can be channelled
reliably into long-term productive investment and developmental projects
are paramount, it said.
The topic for the second session of the IGE is "Debt and debt
sustainability and interrelated systemic issues".
The agreed guiding questions for this second session of the IGE are:
(a) How can current debt vulnerabilities in developing countries be
mitigated and developing country sovereign debt and financial crises
(b) How can sovereign financing, both external and domestic, be leveraged
successfully for sustainable development in future?
(c) What institutional, policy and regulatory changes are required
at the international level to ensure that global economic governance
structures better support the use of responsible financing, by borrowers
and lenders, for sustainable development?
(d) How can existing frameworks and tools be improved to ensure effective,
fair and transparent sovereign debt crisis resolution?
According to the UNCTAD Secretariat Note, relevant policy discussion
and analysis of developing country debt sustainability requires a
holistic approach to reform at the international, regional and domestic
Ultimately, attention should be focused on conditions at all levels
that are consistent with two main objectives: first, to promote a
return to positive net resource transfers from the developed to the
developing world in the short run; and second, to ensure that, in
the long run, developing countries establish the productive and export
capacities required to reduce their reliance on external financing
and support their own development process.
The challenge of this task is that it requires not only a review and
discussion of a wide range of policy options, but also the careful
balancing of national policy spaces to respond to debt challenges
with international regulation to support developing country debt sustainability,
SOME OPENING REMARKS AT IGE SESSION
The second session of the IGE heard some opening remarks by the President
of the Trade and Development Board of UNCTAD, Ambassador Salim Baddoura
of Lebanon; Deputy Secretary-General of UNCTAD Ms Isabelle Durant;
the chair of the session, Mr Paul Oquist, Nicaragua's Minister of
National Policies; and the vice-chair, Ambassador Nozipho Joyce Mxakato-Diseko
of South Africa.
The session also heard video statements from Ms Maria Fernanda Espinosa
Garces, President of the UN General Assembly, and Ms Inga Rhonda King,
President of the UN Economic and Social Council (ECOSOC).
Meanwhile, Mr Richard Kozul-Wright, Director of the UNCTAD Division
on Globalization and Development Strategies, made a presentation of
the UNCTAD Secretariat Note.
In her opening remarks, the Deputy Secretary-General of UNCTAD, Ms
Durant, said that we are meeting at a time when the growth in world
debt and the debt of vulnerable countries gives rise to increasing
interest but also especially worry.
The facts are indeed of great concern, she said, highlighting that
at the end of 2017, the global debt ratio to the global GDP was almost
one-third higher than it was on the eve of the most serious financial
crisis in 2008.
"The systemic causes of this increasing debt means that we must
be consistent if we wish our analyses and recommendations to represent
a useful step in the progress to be achieved in the months and years
Ms Durant cited the Institute of International Finance as stating
that global debt represents three times global GDP, the main concern
being the growth in the debt of non-financial institutions.
While the main banking sectors of developing countries have begun
reducing their debt in line with regulations that were adopted since
the crisis, it is currently the markets for bonds issued by companies
in non-bank intermediaries which are becoming predominant.
There are additional concerns which is that the consumer demand is
being fed by credit, non-financial businesses depend increasingly
on financial activities to get their profits, and national governments
especially in developing countries are becoming more vulnerable as
the debt increases.
These three cumulative trends in addition to the fact that the modest
worldwide recovery since the global financial crisis was and continues
to be upheld by debt, leads to an increase in the mountain of debt,
The Deputy Secretary-General pointed out that a fifth of emerging
and middle-income countries have a debt-to-GDP ratio which is beyond
70% and as to the low-income countries, they have a debt-to-GDP ratio
of over 60%.
This leads to the following conclusion: by mid-2018, the number of
low-income developing countries which are over-indebted, or exposed
to the risk of being so reached 31 as against 13 in 2013.
Their number has practically tripled in such a short period of time,
said Ms Durant.
In presenting the UNCTAD Secretariat Note, Mr Kozul-Wright, Director
of the Division on Globalization and Development Strategies, referred
to the decade since the global financial crisis in 2008 and the decade
leading to 2030 when the international community has promised to complete
the most comprehensive development agenda on record.
Debt is one of the big threads running across those two decades, he
Kozul-Wright noted that just after the global financial crisis had
passed, at its deepest point, the Economist magazine ran a special
report on the situation and it concluded that: "For the developed
world the deep financial model has reached its limit. Most of the
options for dealing with the debt overhang are unpalatable as is already
been seen in Greece and Ireland. Each government will have to find
its own way of reducing the burden. The battle between borrowers and
creditors may be the defining struggle of the next generation."
Kozul-Wright said the thing about this conclusion is not just its
failure to anticipate a return to business-as-usual - the debt finance
model survived - or its inability to actually read the Greek and the
related European bond financial crisis.
What is surprising about the comment (in the magazine) is its unawareness
that debt had been a defining struggle particularly for developing
countries of the previous thirty years of what UNCTAD has called hyper-globalization,
namely the combination of neoliberal economic policymaking, financialization
and the growing concentration of corporate power.
In that world, debt has essentially been both its glue and its solvent
- a world that has become much more highly unequal, more unstable
and under-invested in, he said.
Kozul-Wright referred to a book written by Canadian novelist Margaret
Atwood just after the debt crisis called "Payback", where
she calls debt "the shadow side of wealth".
And like many shadows, it has a long and troubled history which developing
countries are particularly familiar with, he said.
In this context, he referred to the debt crisis in Latin America in
the early 1980s which began in Mexico and became a "lost decade"
for many parts of the developing world, the Mexican "Tequila"
crisis in 1994, the Asian financial crisis in 1997, the Russian bond
crisis the following year with contagion to East Asia after that,
and culminating in the aftermath of the global financial crisis in
He noted that more than a third of the 34 countries classified as
being in debt distress are countries that actually received debt relief
in the years before the financial crisis.
Kozul-Wright said that the big question that UNCTAD began to ask in
the 1970s still remains today: how to harness the potential of external
finance including debt to support national development strategies
while minimising the risks arising in an uncertain and volatile global
He also posed some further questions: Why haven't we found effective
mechanisms to provide sufficient and timely international liquidity?
Why is the burden of debt and the adjustment required still borne
to a very large extent by deficit countries?
Why are capital controls still seen as a toxic part of the policy
toolkit, and blended finance, for example, is being paraded as a solution
when in fact it is almost certainly more toxic in terms of dealing
with these problems?
Why are "soft law" principles that UNCTAD, for example,
has been promoting have been so difficult in gaining real traction?
Why has it been difficult to build consensus on more comprehensive
criteria for determining eligibility and scale of debt relief and
related to that, to understanding and measuring debt sustainability?
Kozul-Wright said that UNCTAD insists that the kinds of systemic problems
that debt poses require systemic solutions.
In this context, he highlighted the need for a sovereign debt workout
mechanism which UNCTAD has been promoting now for over 30 years, but
has been resisted by the international community.
"It is time to put it back on the agenda," he said.
"We are living through a time where the international community
wants to defend a rules-based international multilateral system but
apparently it is a rules-based system that doesn't extend to the issue
He noted that large parts of the international community continue
to resist the need for a rules-based system in the one area where
developing countries know that the damage that they can face when
things go wrong is particularly severe and significant.
GLOBAL DEBT LEVELS AT RECORD HIGHS
According to the Secretariat Note, a decade after the global financial
crisis, global debt levels continue to reach new record highs.
The Institute of International Finance estimates that by the end of
March 2018, global debt stocks had reached $247.2 trillion, up from
$168 trillion at the onset of the financial crisis of 2007-2008 and
by nearly $25 trillion from a year earlier.
UNCTAD estimates that the ratio of global debt-to-world gross domestic
product (GDP) is nearly one third higher than in 2008, with global
debt stocks amounting to more than three times global GDP.
The high dependence of a modest global recovery on debt reflects systemic
fragilities in global growth dynamics that have persisted, despite
the profound shock of the financial crisis.
In a policy context where the burden of recovery has shifted to strongly
accommodative monetary policies by central banks in lead economies,
global economic growth has remained heavily reliant on easy financing
conditions and short-term expectations of appreciations in asset values.
While core banking sectors in most developed economies have consolidated
their positions and de-leveraged substantially, regulatory loopholes
have facilitated the re-emergence of unregulated financial credit
default swap (insurer) markets "in the shadows", significantly
augmenting the danger of cascading financial vulnerabilities in the
event of a collapse of underlying markets.
More generally, the financialization trends that led to financial
collapse a decade ago - high profitability in financial sectors outpacing
that in real sectors, a growing dependence of non-financial firms
on financial activities for their revenue flows, the prevalence of
short-term investment strategies (including mergers and share buybacks),
as well as consumer behaviour tied to asset bubbles and easy access
to credit - continue to thrive.
An additional source of concern is the widely observed sharp increase
in market concentration in leading non- financial (especially high-technology)
Together, these trends result not only in heightened financial fragilities,
but in persistent downward pressures on aggregate demand, income and
employment and thus slow global growth, said UNCTAD.
The abundance of cheap credit has favoured booming cross-border private
capital flows. Such booms failed to support global capital formation
in the 1990s, and their volatility and procyclicality - inflows of
cheap credit in good times and sudden large outflows of capital at
the first sign of potential difficulties - were a core cause of developing
country financial and currency crises at the time, such as the Asian
financial crisis of 1997.
The post-crisis period has not seen any progress in improving the
management of private capital flows for purposes of longer-term productive
investment and development, said UNCTAD.
Not only are private cross-border capital flows today at least as
volatile as in the 1990s, they involve larger magnitudes and more
An important implication is that developing countries' debt sustainability
has, on average, been affected by private capital flow reversals,
whether or not Governments promoted strong economic fundamentals,
such as relatively low public debt, small budget deficits, low inflation
rates and high reserve holdings.
At the same time, the sectoral dynamics driving ballooning debt burdens
and potential debt crises have changed.
A decade ago, unsustainable household debt in the United States of
America and excessive borrowing by financial institutions triggered
The main focus of worry has instead shifted to fast rising non-financial
corporate debt in developed and larger emerging economies, with corporate
bond markets and non-bank intermediaries playing an increasingly important
According to Standard and Poor Global, corporate non-financial debt
has grown faster than nominal GDP for much of the past decade.
Globally, over one third of non-financial corporations are now highly
leveraged with gearing (debt-to-earnings) ratios of 5 and above, up
from only 5 per cent in 2007, while non-investment-grade corporate
bonds have quadrupled since 2008.
Corporate bond markets have grown particularly fast in large emerging
economies in Asia and Latin America, with around 20-25 per cent of
corporate bonds at growing risk of default, despite still relatively
low interest rates.
According to UNCTAD, this fragile financial and economic environment
poses serious challenges for developing country debt sustainability.
While the bulk of global debt is still held in developed countries,
emerging and developing country debt rose from just under 40 per cent
of global GDP in 2008 to 93.2 per cent in 2017.
For developing countries as a whole, total external debt stocks are
estimated to have reached $7.64 trillion in 2017, having grown at
an average yearly rate of 8.5 per cent between 2008 and 2017, or more
than 80 per cent over the period.
Over the same period, total external debt stocks increased from $155
billion to $293.4 billion in the least developed countries, representing
an average annual growth rate of 7.4 per cent.
Emerging economies registered a slightly higher average growth rate
at 9.5 per cent of their external debt stocks.
For all developing countries, the debt-to-GDP ratio rose from 21.8
per cent in 2008 to 25.7 per cent in 2017.
However, said UNCTAD, this aggregate figure masks more worrying trends
in a growing number of developing countries.
According to the International Monetary Fund, by 2017, debt-to-GDP
ratios had climbed to above 70 per cent in one fifth of emerging and
middle-income countries and to above 60 per cent in one fifth of low-income
Including implicit liabilities, such as pension and health care spending,
these figures increase to 112 per cent for emerging and middle-income
countries and to 80 per cent for low-income countries, respectively.
By mid-2018, the number of low-income developing countries at high
risk of debt distress or already in debt distress had risen from 13
in 2013 to 31 (24 at high risk and 7 in debt distress).
These categories include 14 of the 34 low-income developing countries
that received debt relief under the Heavily Indebted Poor Countries
Initiative or the Multilateral Debt Relief Initiative.
An immediate implication of rising debt ratios are higher debt service
burdens, even under favourable financing conditions.
For developing and transition countries as a group, the debt-service-to-export
ratio rose from 8.7 per cent in 2011 - its lowest point since the
onset of the global financial crisis - to 15.4 per cent in 2016.
In 2017, this fell to 13.6 per cent, largely due to a recovery of
some commodity prices since mid-2016.
In the least developed countries, this ratio also saw a pronounced
increase from 4.1 per cent in 2008 to almost 10 per cent in 2017,
and in sub-Saharan Africa it more than tripled from 3.8 per cent in
2011 to 12.9 per cent in 2017.
In poorer economies, interest payments as a percentage of government
revenue more than doubled from 5.7 per cent in 2008 to 14 per cent
in 2017, and to 18.5 per cent in sub-Saharan Africa, reaching as much
as 30 per cent of tax revenue in some sub-Saharan economies.
These developments effectively reverse the substantial achievements
of the 2000s in developing country debt sustainability, when average
regional debt-to-GDP ratios fell to levels ranging from 40 per cent
to less than 20 per cent across the developing world, and debt service
costs also declined significantly, said UNCTAD.
The most important common denominator of rising debt vulnerabilities
across developing countries is that the more conventional triggers
of debt distress have been amplified by the rapid integration of developing
countries' shallow financial and banking systems, both public and
private, into volatile and largely unregulated international financial
In short, said UNCTAD, in a global economic environment dominated
by largely unregulated international financial markets and the ad
hoc sensitivity of financial players to day-by-day economic news,
developing countries have limited policy space to leverage debt sustainably
for long-term development strategies.
Instead, such strategies, whether reliant on international sovereign
bond issuance, domestic bond markets or corporate debt, are likely
to be thwarted by sudden reversals of international cheap credit flows
in response to changes in policy variables beyond the control of developing
country Governments, as well as subsequent domestic capital flight.
External financing through debt-related mechanisms is a key element
of any development strategy as developing country productive and financial
structures become increasingly complex.
With global financial integration continuing apace, the question for
policymakers, in developing countries and the international community
alike, is how to harness the potential of external finance, including
debt, to support national development strategies, while minimizing
the risks arising in an uncertain and volatile global economic environment.
The fact that developing countries have experienced a continuous net
negative transfer of their resources to developed countries in recent
decades serves to underline the magnitude of the challenge.
One estimate suggests that since 1980, developing countries have been
net providers of resources to the rest of the world, amounting to
about $16.3 trillion.
Given the global nature of many of the determinants of developing
country debt sustainability, policy reform at the level of international
monetary and financial governance is indispensable, said UNCTAD.
Regulatory reforms to stabilize international financial markets have
made only muted progress, it added.
In the absence of more concerted international policy action to reign
in financialization, developing countries are well advised to consider
the adoption of capital control measures as a key management mechanism
of financial flows and external debt burdens over global credit and
Additionally, proactive debt management policies to lock down favourable
financing conditions over long periods of time are essential.
In view of rising instances of high debt distress and debt default
in developing countries, long-standing debates about necessary improvements
to existing restructuring mechanisms for sovereign debt take on new
Existing processes to deal with the resolution of sovereign debt crises
are fragmented, slow and often result in unfair burden sharing and
high economic, social and political costs for the sovereign debtor.
UNCTAD has argued since the onset of the first major developing debt
crises in the late 1970s and early 1980s that orderly workout procedures
for sovereign debt should meet two objectives: They should help prevent
financial meltdown in countries facing difficulties servicing their
external obligations, and they should provide mechanisms to facilitate
an equitable restructuring of debt that can no longer be serviced
according to the original contract.
According to the UNCTAD Secretariat Note, a multilateral framework
for sovereign debt restructuring can start from a few basic features:
(a) A temporary standstill for public and/or private debt, to be declared
unilaterally by the debtor country and sanctioned by an independent
panel to avoid conflicts of interest;
(b) Standstills should be accompanied by exchange controls, including
the suspension of convertibility for foreign currency deposits and
other assets held by residents as well as non-residents;
(c) Provision should be made for debtor-in-possession financing, automatically
granting seniority status to debt contracted after the imposition
of a standstill, as well as for lending into arrears for financing
imports and other vital current account transactions;
(d) Debt restructuring, including rollovers and write-offs, should
take place based on negotiations between the debtor and creditors.