A study by the Institute of International Finance, a trade body representing large banks that lend into emerging markets, found all but three of 25 recent IMF programmes saw a reduction in debt increase over five years, with an average decline of 27%.
The 16 economies that restructured their debt, including major bailouts such as Argentina in 2005 and Russia in 1999, saw debt fall by 34%, compared with just 8% for those that did not.
“The extent to which debt fell depended heavily on whether some form of debt restructuring was involved: either a Paris Club deal, a restructuring of commercial debt, or both,” said Sergi Lanau, IIF deputy chief economist.
The findings coincided with the release of statistics by the World Bank that showed the total stock of outstanding external debt of low and middle-income countries climbed by 5.3% to $7.8tr last year.
The IIF found countries that went through IMF programmes enjoyed strong economic growth rising to as high as 6% a year after five years, as countries left behind the often complicated situations that triggered the need for a bailout.
While restructuring has been a boost for debtor countries, it has led to substantial losses for lenders such as bondholders. Research by academics five years ago found the average “haircut” for lenders in 180 restructurings between 1970 and 2010 was 37% — although half saw at least 53% of debt wiped out.
The IMF is currently engaged in a number of high debt programmes including in Argentina, Pakistan, and Sri Lanka. The fund has lent $57bn to Argentina, which last month said it would seek to restructure its debt with the IMF by extending its maturity.
Lanau said market prices for bonds were pricing in principal losses and there was “significant risk” over whether Argentina could issue enough debt to avoid a negotiation with creditors. “What form this takes will depend a lot on the macroeconomic environment after the elections, policies of the new government, amounts the IMF wants to lend [and] views of creditors.”
Debt transparency warning
Meanwhile, last year there was also a drop in bond issuance by 112 low and middle-income countries, according to the World Bank. It fell by 26% to $302bn in 2018 amid heightened global uncertainty, tighter capital markets, and credit ratings downgrades.
New issuance by sovereign and other public-sector entities fell by 24% in 2018, to $207bn, while new issuance by private sector entities was down 29% from its prior year level, to $95bn.
While total debt stocks rose last year, lending to poor countries by countries such as China, India and Saudi Arabia that are not part of the Paris Club suffered a “substantial” slowdown, according to figures from the World Bank. New commitments from this group fell 37% from $12.6bn in 2017 to $7.9bn in 2018.
The bank said the share of new commitments from non-Paris Club bilateral creditors fell to 17% while the share made under bilateral deals with club members — typically advanced economies — remained steady at 12%.
In total, new gross commitments to the 75 countries that are clients of the bank’s International Development Association lending arm fell by 4% to $45.8bn in 2018. Net debt flows — gross disbursements minus principal payments — from external creditors tumbled 28% to $529bn.
Bank officials indicated mounting trade tensions and tighter rules on debt transparency had caused the drop-off and were likely to hurt future debt flows.
“Uncertainty in global financial markets has increased as an outcome of several factors such as sluggish economic growth and low volumes of trade,” one said. “This has contributed to a slowdown of non-Paris Club lending to developing economies.”
The figures may, however, ease fears in the development community that poor countries — especially in Africa — are taking on Chinese debt to fund major infrastructure payments that they may struggle to repay.
Although it did not mention China, the bank blamed the trade wars that it said had discouraged non-Paris Club creditors from lending to developing economies. “This can serve as an indication for expected lower debt obligations in the future,” it said in annual debt statistics report published this week.
David Malpass, the World Bank’s president, said developing countries needed more investment that meets their development goals but stepped up his call for greater transparency in new debt taken out by poor countries from non-traditional lenders.
“Debt transparency should extend to all forms of government commitments, both explicit and implicit,” he said. “Transparency is a critical part of attracting more investment and building an efficient allocation of capital, and these are essential in our work to improve development outcomes.”