IMF WARNS OF MOUNTING DEBT CRISIS IN POOR COUNTRIES / THE FINANCIAL TIMES

IMF warns of mounting debt crisis risk in poor countries

Borrowing rises at worrying pace as western institutions’ role comes under strain

Kate Allen in London



People queue to buy food in Caracas. Russia’s deal in November to restructure $3bn of Venezuela’s debt allowed the South American nation to sidestep western creditors © FT montage; Getty Images


The world’s poorest countries are increasing their borrowing at a worrying pace and face the mounting risk of debt crises, the IMF has warned.
 
Since 2013, the median ratio of public debt to gross domestic product in low-income countries has risen 13 percentage points to hit 47 per cent in 2017, according to new research by the IMF.
 
The research found that 40 per cent of low-income developing countries face “significant debt-related challenges”, up from 21 per cent just five years ago.
 
Fiscal deficits rose between 2013 and 2017 in nearly three-quarters of the nations the IMF studied, and in nearly half of those cases the deficit increase came despite a decline in investment, an indication that the debt was not being put to productive use economically.
 
As a result it is becoming increasingly likely that more poor countries will face a debt crisis, the IMF staff paper said.

IMF board members have expressed “serious concern” about the debt build-up and concluded that there was an “urgent need for fiscal prudence and improved debt management”, the organisation said.
 
At the same time, historic methods of resolving sovereign debt crises, such as the Paris Club forum for wealthy creditor nations, are becoming more difficult, given an increasing proportion of low-income countries’ debt is bought by other types of investors, according to the researchers.
 
The IMF, which historically has often taken the lead in dealing with such crises, expressed its concern that this development could undermine the role of western-oriented institutions in resolving such problems in the future.
 
The diminished role of traditional creditor forums comes as buoyant debt markets have eased borrowing conditions for low-income countries. Strong investor demand for emerging economies’ debt — fuelled by a hunt for yield — has attracted countries that have rarely, if ever, issued bonds in the recent past, such as Tajikistan and Iraq.




The riskiest countries are selling debt at record rates, and sales of long-dated debt are also at record levels.

“Larger shares of public debt [are] being held by non-Paris Club official bilateral creditors, by foreign commercial creditors, and by domestic creditors, mainly banks,” said Sean Nolan, IMF deputy director of strategy, policy and review.

“The enhanced reliance on commercially priced debt has translated into higher debt servicing costs and risks, while the shift in the composition of the creditor base creates challenges for potential debt resolutions.”

Although the IMF did not mention specific examples, Russia’s deal in November to restructure $3bn of Venezuela’s debt allowed the oil-rich South American nation to sidestep major western creditors.

Both Russia, which is a member of the Paris Club, and China, which is not, are emerging as alternative venues for embattled countries seeking to avoid debt restructuring managed by traditional economic powers such as the US and western Europe.

The IMF report called on lenders to “work with existing international fora for creditor information-sharing and co-ordination”.“Greater transparency on the scale and terms of lending is needed,” it said.



The increasing bond market activity of low-income countries has pushed up the amount they spend on servicing their debts.

Developing countries’ debt payments increased 60 per cent in the three years to 2017, according to research published last week by the Jubilee Debt Campaign, which lobbies for debt forgiveness in emerging markets.

The external debt payments made by 126 developing countries rose from 6.7 per cent of government revenues in 2014 to 10.7 per cent in 2017, it found.

Tim Jones, an economist at the Jubilee Debt Campaign, said: “Reckless lenders need to be made to bear some of the costs of economic shocks through lower debt payments, allowing governments to maintain spending on essential services.”