The Politics of Foreign Borrowing in Middle Income Countries
by
Benjamin Cormier
A thesis submitted in conformity with the requirements for the degree of Doctor of Philosophy Department of Political Science University of Toronto
© Copyright by Ben Cormier (2019)
Abstract
The Politics of Foreign Borrowing in Middle Income Countries PhD 2019 By Benjamin Cormier Department of Political Science University of Toronto
Middle Income Countries (MICs) can use either official development finance or private markets
when borrowing abroad. Each of these options provide different benefits and costs. How do
MICs decide which option to prioritize? Why do MIC borrowing preferences vary? This study develops and tests a theory of partisan external borrowing preferences in MICs. Controlling for
global and national economic conditions, right governments are more likely to use official
financing while left governments are more likely to use private financing. The only time this is not the case is when there is an exceptionally large deficit, forcing the MIC to use creditors they
would not otherwise. Fractioned regression and panel data models test the argument
quantitatively, while four country case studies of Thailand, South Africa, Botswana, and Peru trace and illustrate the causal process. Explaining why borrowing preferences systematically vary
across MICs has policy and theoretical implications with respect to debt sustainability, policy
autonomy, and international financial relations in developing countries. Politically constrained
borrowing also signals that transparency is essential for effective debt management in finance
ministries.
ii Acknowledgements
This dissertation, and the PhD process overall, would never have been completed if not for the generosity and support of many people. My committee deserves sincere thanks for their time and support. Mark Manger was invaluable on professional and personal levels. His patience answering methodological questions allowed me to actually learn without fear of embarrassment. His willingness to work with me on other projects was an important confidence boost. His practical approach to everything, and his concern for me as a person outside of academia, made the final years of the PhD sensible and manageable. Lou Pauly was integral to connecting my simple curiosities to the field of political science. He stuck with me as I fumbled around figuring out what this project was. Antoinette Handley always found time to read everything and share precise comments despite increasingly- demanding roles during my time in Toronto. Her clarity of thought was essential to making this research coherent. Al Berry’s detailed comments, economic insights, and knowledge of Peru ensured I was asking the right questions and accounting for relevant factors from the outset. I learned from many others at U of T. Thanks to Seva Gunitsky, Gerry Helleiner, Matt Hoffmann, Sara Hughes, John Kirton, Wilson Prichard, Stefan Renckens, and Wendy Wong for either involving me with their work or discussing my work with me at various stages. Many visitors to U of T graciously took time to discuss and sharpen this research. Thank you to Vincent Arel-Bundock, Leo Baccini, Miles Kahler, and Layna Mosley for meeting with me while in Toronto. Thank you also to many fellow PhD travelers, especially Mike Gavin and Scott McKnight. I learned a lot from Mike and Scott was a real friend through all stages of the grind. A special thank you to Paul Cadario, whose enthusiastic support for students at U of T is unparalleled. Not only did he always involve me in his goings-on, but the fieldwork I did could not have taken place without his eagerness to share his vast network. Thank you to the School of Graduate Studies, the Munk School’s Richard Charles Lee Insights Through Asia program, and the Department of Political Science’s Michael W. Donnelly political economy fellowship for financial support for fieldwork. That fieldwork further depended on the time of many people in four countries on three continents in 2017. Thank you also to the many anonymous interviewees who took time for me and the support of academics from Thammasat University, University of Pretoria, University of Botswana, Universidad del Pacifico, and Universidad Católica del Perú. My deepest gratitude goes to my wife Ashley. Thank you for participating in this weird and uncertain journey, ensuring we always appreciate and enjoy the moment. You are the best. Thank you also to Christina, Lindsay, and the extended Koen clan for making Toronto a second home. Thank you to my friends, brother, and family for keeping me tied to New Hampshire, always letting me come home as if I never went anywhere. I dedicate this work to my parents, Mark and Betsy. Their love and belief are the only reasons that this whole endeavor, and everything that led to it, was possible. I could tell a linear story of my life to this point, but in reality it’s a chaotic story that only makes sense because of their support. Thank you.
iii Table of Contents
Chapter 1: Introduction
Chapter 2: Literature Review
Chapter 3: Theory and Quantitative Analysis
Chapter 4: South Africa & Botswana
Chapter 5: Peru
Chapter 6: Thailand
Chapter 7: Conclusion 1 – The Implications of Partisan Borrowing
Chapter 8: Conclusion 2 – A Policy Recommendation for Effective Public Debt Management in Developing Countries
Bibliography
Appendices
iv List of Tables, Figures, and Appendices
Chapter 1 Table 1: Country Cases’ Annual New External Debt Commitments (% Official) 5
Chapter 2 Graph 1: Average External Borrowing: MICs vs LICs 14 Tables 1a & 1b: Annual Average Interest Rates and Maturities of New MIC Debt 18
Chapter 3 Table 1: Modeling the Partisan Effect on MIC External Borrowing 48 Figure 1: Adjusted Predictions of MIC Partisan External Borrowing 49 Figure 2: Adjusted Predictions: Center Governments Dropped 49
Chapter 4 Chart 1: South Africa and Botswana New External Debt Commitments (% Official of 54 Total New Debt) Chart 2: South Africa Central Government Primary Budget Position (%) 59 Chart 3: Botswana Central Government Primary Budget Position (%) 76 Chart 4: South Africa and Botswana Sovereign Credit Ratings 86 Chart 5: South Africa and Botswana Annual % Growth 87 Chart 6: South Africa and Botswana External Debt Stocks (% GNI) 87
Chapter 5 Chart 1: Peru Annual Commitments (% Official) by Partisanship 90 Chart 2: Peru Central Government Fiscal Balance and Expenditure Levels (% of GDP) 117 Table 1: Peru Sovereign Credit Ratings (year-end) 118 Table 2: Bond Data from MEF 119
Chapter 6 Chart 1: Thailand Annual Commitments by Governing Party Partisanship (% Official) 121 Chart 2: Thailand Central Government Fiscal Balance and Expenditure Levels 148 Table 1: Thailand Sovereign Credit Ratings 149
Appendices Appendix A: Table 1, Model 8 Country-Year List Appendix B: Main Models Variable Information (And Country Income Level Coding) Appendix C: Table 1, Model 8 Summary Statistics Appendix D: Robustness Checks of Main Model Appendix D1: Models of MIC External Borrowing With China Variables Appendix D2: LICs, no partisan effect Appendix F: Interview List
v Chapter 1: Introduction
External Borrowing Options and Politics
Middle Income Country (MIC) governments have options when borrowing externally.
They are poor enough to access official finance from multilateral and bilateral development institutions but also creditworthy enough to access private finance from bond markets and banks.
These options provide different benefits and costs. Official finance comes with low interest rates and long maturities but include conditions. Private finance is condition-free but more expensive and shorter-term. MICs thus face a tradeoff between the price benefits of official creditors and the autonomy benefits of private creditors when borrowing abroad.1 How MICs navigate this tradeoff has implications for their development prospects, particularly because external borrowing decisions affect debt sustainability, fiscal space, state investment capacity, policy autonomy, and international financial relations.
Why do MIC governments use different external creditors, taking on different benefits and costs when financing national budgets? Strict focus on national economic fundamentals, credit ratings, or global economic conditions cannot fully answer this question. Two brief country examples illustrate this. On one hand, high growth and a reputation for good governance have given Botswana some of the highest credit ratings among MICs from 1990-2015.2
Domestic officials and bankers confirm that markets show “all sorts of demand” for Botswana’s debt and that foreign investors “knock on our door all the time.”3 Yet Botswana resists these eager financiers. As one national official says, there are “stories about the benefits of issuing,
1 See Gurria and Volcker 2001; Fallon et al. 2001; Loser 2004; Griffith-Jones, Griffith-Jones, and Hertova 2008; Hostland 2009; World Bank 2012; World Bank 2017. 2 See Chapter 4, Chart 4. 3 Interviews 77 and 73, respectively.
1 [but we] just don’t buy it.”4 Despite significant market access, Botswana prefers official credit from development institutions when borrowing abroad.
On the other hand, in the same period of time, neighboring South Africa came to have lower credit ratings due to inconsistent growth, troubling debt levels, and corrupt state-owned enterprises.5 Private finance was still available to South Africa but at higher interest rates and shortening maturities.6 Lower rates and longer maturities were available from official creditors, but government avoided these cheaper alternatives.7 In the words of one finance ministry official, development banks are “a no go” in South Africa despite their benefits.8
These foreign borrowing policies may not make sense at first glance. Botswana is more creditworthy but avoids markets. South Africa is less creditworthy but insists on using markets.
Why do these governments view external financing options differently and borrow accordingly?
This study explains how domestic politics, specifically government partisanship, shapes MICs’ external borrowing choices. In most circumstances, right governments are more likely to use official external credit and left governments are more likely to use private external credit.
Partisanship shapes borrowing preferences because partisanship signals the economic ideology and core constituencies of the governing party. Right-leaning governments do not resist conditions that promote “good” economic policy since right-leaning constituencies prefer policies that integrate the country into the global economy in the first place. This allows right- leaning governments to take advantage of cheaper official credit that puts less pressure on national debt levels, a further boon to constituencies that prioritize prudent macroeconomic
4 Interview 80. 5 See Chapter 4. 6 5-6.875%, per bond data from Interview 50 covering 2007-2016. 7 See Chapter 2, Tables 1a and 1b. 8 Interview 48.
2 management. In contrast, left-leaning governments do resist trade, privatization, fiscal, labor, procurement, production, or other conditions because left-leaning constituents prefer policies that protect them from the negative adjustments associated with integration into the global economy.
Private market finance ensures these left-leaning governments maintain the policy autonomy that serves their constituencies, at the cost of using more expensive financing sources.
Indeed, this study’s complete thesis is as follows: right-leaning governments are more likely to use official credit and left-leaning governments are more likely to use private credit.
This is because right governments prefer the policies and aims of official loan conditions in the first place, allowing them to take advantage of official creditor price benefits. Left government constituents resist conditions, incentivizing use of condition-free but expensive market finance.
The only time this partisan effect does not exist is at very high budget deficit levels. In such instances, governments are forced to use financing options they would otherwise avoid in order to cover unusually large financing needs.9
This theory is built on both international political economy (IPE) and comparative development literatures, which are reviewed in Chapter 2. The theory is fully developed in the first half of Chapter 3. To date, such borrower-centric views of financial flows are not common in the International Political Economy (IPE) literature. There is little work that specifies the entire menu of developing country financing options and the politics that shape financial flows to developing countries. Those who do consider borrowing preferences do not delimit MICs as a unique class of borrowers with a particular set of external borrowing options. This lack of analytical clarity means theorization of MIC borrowing decisions is minimal and the effect of
9 While right governments may also be expected to maintain minimal deficits, revenue challenges or global economic conditions can have detrimental impacts on even conservative government budgets in MICs. See Baunsgaard and Keen 2005; Wibbels 2006; Bastiaens and Rudra 2016. Others point out how moral hazard problems ensure markets are available in such times. See Jeanne and Zettelmeyer 2001; Wyplosz 2017.
3 borrowing strategies on MICs’ development prospects is not well understood. More broadly, this means the partisan politics of foreign economic policy is missing in the IPE of finance and development. This study shows the partisan effects on foreign economic policy and calls attention to an under-appreciated political factor that explains significant variation in developing countries’ strategies for participating in the global economy.10
Research
This study uses an iterative multi-method approach to ensure qualitative evidence reflects the causation suggested by econometric models.11 The first stage of research involved initial quantitative work on the partisan hypothesis derived from the literature. The second stage included four country case studies, which tested the validity of initial quantitative results by tracing causal processes in MICs. Comparing state behaviors provided building blocks for theory refinement and development.12 The third stage returned to the quantitative work to provide a
“final summary of causal inferences justified through [qualitative] information.”13
Econometric results are reported in Chapter 3. The analysis is based on a combination of fractioned regression and various panel data models, with dozens of specifications of each approach. Qualitative work compares four MIC cases: Thailand, South Africa, Botswana, and
Peru. The case studies exhibit substantial variation on the dependent variable,14 which is the annual percent of new external debt commitments that come from official rather than private sources. Each case’s external borrowing from 1990-2015 is charted in Table 1.
10 Only a few specialists have noted the effect of partisanship on other economic policy areas in developing countries, such as Pinto 2013; Pinto, Weymouth, and Gourevitch 2010. 11 Seawright 2016, chaps 2–4. 12 George and Bennett 2004, 78. 13 Seawright 2016, 14. 14 Geddes 1990.
4
Table 1: Country Cases’ Annual New External Debt Commitments (% Official)
South Africa Botswana 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Peru Thailand 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: World Development Indicators and author’s calculations
5 Chapter 4 compares South Africa and Botswana. These are combined into one chapter because they are one-party democracies with consistent external borrowing policies, simplifying the task of identifying partisan effects on external borrowing from 1990-2015. Chapters 5 and 6 devote full chapters to both Peru and Thailand because changes in government require detailed tracing of policy changes alongside changes in government partisanship over time. Major focal points for process tracing when studying debt accumulation are fiscal and debt laws as well as budgeting and borrowing procedures in each MIC. Fiscal and debt laws are flexible across the cases, providing little constraint on spending or borrowing.
In addition to the significant variation on the dependent variable, the cases also provide tests of possible counter-arguments or potentially serious limits to the partisan hypothesis. Most generally, the partisan effect is not dependent on region as the four cases span three continents.
The South Africa and Botswana studies illustrate how national economic fundamentals and market access cannot independently explain which external credit sources a MIC used from
1990-2015. If they did, South Africa and Botswana’s borrowing histories would be flipped. Peru addresses possible effects of ministerial independence, as the country’s economic ministries are widely regarded as neoliberal “islands of efficiency” ostensibly independent from political interference.15 While this may be true in the policy areas of money and trade, Chapter 5 shows that the partisan effect on borrowing decisions is inescapable despite Peru’s powerful finance ministry. Thailand’s multiple military coups from 1990-2015 allow for analysis of the partisan effect in periods of authoritarian rule. Furthermore, Thailand’s efforts to deepen domestic markets after the 1997 Asian Financial Crisis shows how, even when domestic markets for government debt are large, the partisan effect on borrowing decisions persists when a MIC does
15 Crabtree and Durand 2017a.
6 turn abroad for finance. Finally, although South Africa and Botswana are one-party democracies with stable partisan preferences from 1990-2015, Peru and Thailand show how the partisan effect persists as governments and their partisan agendas change. Partisanship affects external borrowing across this variety of contexts.
In practice, these case studies included nearly 100 interviews over multiple months in each country in 2017. Interview subjects included current and former politicians, ministers, finance ministry bureaucrats, central bank bureaucrats, multilateral and bilateral development institution staff, foreign investors, domestic bankers, bond issue bookrunners, and labor union representatives. These interviews allowed for process tracing, or analyzing sequences of events to identify causal mechanisms hypothesized and tested in the quantitative work. Details on cited interviews are listed in Appendix F.
Implications
The accumulation of debt is a crucial policy issue because it affects debt sustainability, fiscal space or state investment capacity, and policy autonomy, all of which shape MICs’ prospects for economic and social development. Sustainable debt positions strike a balance between favorable interest rates and long maturities (among other characteristics) while still promoting economic growth and social welfare. Indeed, not borrowing would minimize state resources and represent missed opportunities. At the same time, onerous debt positions will limit a state’s ability to sustain its contributions to development. At their worst, unsustainable debt positions lead to crises and impotent states that do not have the capacity to contribute to development.16
16 On the benefits and risks of debt in developing countries, see Frieden 1991; Mosley 2003; Gill and Pinto 2005; Reinhart and Rogoff 2009; Gunter, Rahman, and Shi 2009; Reinhart, Reinhart, and Rogoff 2012; Cabral 2015.
7 Debt sustainability affects fiscal space, “the room to raise spending or lower taxes… without endangering market access and debt sustainability.”17 How a country borrows externally will shape the ability of the state to use spending and investment as a stabilizing force in the face of changing global economic conditions, particularly insofar as different interest rates and maturities shape the degree to which resources are cannibalized by the need to repay foreign debt obligations.18 Fiscal space reflects the ability of the state to continually invest in domestic economic and social development, a critical role for the state in developing countries.19
But as signaled so far in this introduction and detailed throughout this study, MIC borrowing decisions do not only shape national debt portfolios. Policy autonomy is also at stake because MICs have financing options that include conditions. In this sense, MICs’ external borrowing strategies can also affect the policy space or autonomy MICs have when managing their participation in the global economy. Policy autonomy shapes development prospects not only for the country as a whole but also sectors that depend on and interact with the global economy.20
Over time, then, MIC borrowing strategies can enhance and sustain a state’s ability to contribute to economic and social development, or they can lead to unfulfilled aspirations and crises. This applies to the two MICs discussed in the opening. Botswana currently grows at a stable rate but faces diamond dependence and high inequality. Private finance could help diversify the economy, increase public spending, benchmark for private sector financial activity, and develop the public debt market for the future. But they resist these resources. Meanwhile,
17 International Monetary Fund 2018a, 9. 18 On this theme, see Wibbels 2006; Dreher and Gassebner 2012; International Monetary Fund 2016; International Monetary Fund 2018a. 19 On the importance of state investment capacity in developing countries, see Gerschenkron 1962; Evans 1979; Evans 1995; Wade 1990; Kohli 2004; Rudra 2007; Centeno et al. 2017. 20 On the importance of and constraints on developing country policy autonomy, see Wade 2003; Mosley 2003, chap. 4; Rodrik 2006; Rudra 2008; Grabel 2011; Nooruddin and Rudra 2014; Bastiaens and Rudra 2016.
8 South Africa faces fiscal and debt problems. Lower interest rates and longer maturities from development banks could make national finances more sustainable. Implementation and monitoring support from official creditors may also help with investment effectiveness and corruption. But South Africa continues to avoid official credit. Each government’s borrowing strategies since the early 1990s have shaped their current economic strengths and weaknesses.
Indeed, debt is “crucial to all economies… but balancing the risk and opportunities of debt is always a challenge.”21 Since different external creditors have different effects on debt sustainability, fiscal space, investment capacity, and policy autonomy, external borrowing choices are pivotal policy decisions that shape MIC development prospects. But as this study shows, external borrowing decisions are necessarily shaped by partisan politics. This means the effects of borrowing on MIC state contributions to development are also political. This gives rise to a few major policy implications, which are detailed in Chapter 7.
Finally, the politics of public borrowing in MICs also give rise to practical implications for the national ministries responsible for this policy area, Debt Management Offices (DMOs).
Specifically, politicized borrowing means the ability of DMOs to ensure sustainable public debt levels does not depend on autonomy. Because political constraints on debt managers’ work is inevitable and to some degree legitimate,22 independence from politics is neither a useful lens to analyze DMO capacity to manage debt nor a reasonable goal for those interested in increasing
DMO capacity to ensure debt remains at sustainable levels. This makes DMOs different from many other national economic ministries such as central banks. Instead, DMO effectiveness depends on transparency, insofar as maximizing information increases the ability of DMOs, markets, citizens, and other stakeholders to hold policy makers accountable for the effect their
21 Reinhart and Rogoff 2009, xxv. 22 Wheeler 2004; World Bank 2015b.
9 policies and preferences have on national debt. Although the relationship between partisanship and transparency itself requires a separate study, this study of political constraints makes clear transparency is a crucial tool for DMO effectiveness. This is unpacked in detail in Chapter 8.
10 Chapter 2: Literature Review
Introduction
International Political Economy (IPE) has little to say about how MICs choose from external financial options. This is because different financial options are almost always studied in isolation. They are not treated as alternatives or substitutes available to MICs, minimizing the need to consider borrower autonomy. Because the field does not adequately address variation in developing countries’ use of foreign finance, IPE cannot say much about the implications of different borrowing preferences for national development, the sustainability of international financial flows, or the future of international financial relations.
To address this, I draw on the field of comparative development to develop a partisan theory of MIC external borrowing. Foreign borrowing is shaped by partisanship because external borrowing options have implications for partisan constituents. This means the state must use finance that does not force unnecessary negative adjustment on those groups. This theory was previewed in the Introduction and is fully detailed in Chapter 3.
Before moving onto the theory, this chapter reviews the shortcomings in the literature and connects IPE to comparative development. The first section distinguishes MICs and specifies their external borrowing options. The second section covers how most theory and research in the
IPE of finance does not adequately consider borrower autonomy so cannot explain how MICs choose from these options. The third section outlines why partisanship is likely to shape MIC borrowing decisions. This sets the stage for the partisan external borrowing hypothesis tested quantitatively in the next chapter and traced in four subsequent case studies.
11 Specifying MIC External Financial Options
MIC status is a World Bank categorization based on national income level. It indicates a country is poor enough to access official development finance from multilateral and bilateral development institutions, but also creditworthy enough to access private sources of finance such as bond markets and commercial banks.1 Their creditworthiness means MICs only or primarily access market-competitive windows such as the World Bank’s International Bank of
Reconstruction (IBRD) and similar windows at other official lenders.2 They do not normally access the grant windows of these institutions, though there are exceptions.3 MICs have borrowing options and must navigate “all potential external creditors and markets… with their respective financial terms and conditions offered” when seeking finance.4
On the official side, multilaterals and bilaterals are not identical. But they do share characteristics that set them apart from private options.5 A key theme is loan conditions. While
Western conditionality has changed somewhat over time, key components of the Washington
Consensus economic paradigm persist in multilaterals and bilaterals.6 Moreover, second- generation conditions addressing governance remain just as penetrating and controversial.
Reforms of judicial, regulatory, governance, and civil service institutions seek “deep changes in… systems can hardly be carried out without lengthy discussion and the participation … of the affected parties.”7 Meanwhile, Chinese and other non-Western credit involve formal and
1 Gurria and Volcker 2001; Fallon et al. 2001; Loser 2004; Griffith-Jones, Griffith-Jones, and Hertova 2008; Hostland 2009; World Bank 2012, paras 20, 21; Knack, Xu, and Zou 2014; World Bank 2017, 9; Linn 2017. 2 Knack, Xu, and Zou 2014; Linn 2017, n. 1. 3 World Bank 2012, para. 8. Such exceptions are controlled for in the analysis. 4 World Bank 2015b, 41. 5 On essential similarities across many official lenders, see Krasner 1985, chap. 6; Bøås and McNeill 2004; Woods 2006; Lim and Vreeland 2013; Best 2014; Dreher, Nunnenkamp, and Thiele 2011; Frot and Santiso 2011; Stubbs, Kentikelenis, and King 2016. 6 Best 2014, 105; Babb 2013; Cormier and Manger 2018. 7 Navia and Velasco 2003, 268; Rodrik 2006.
12 informal conditionality related to lenders’ strategic interests, tied labor, tied inputs, or collateral, making these financial options similarly more demanding on borrowers’ domestic political economies than private market finance.8 Thus, while it is certainly the case that non-Western creditors differ from Western pricing, conditionality, and standards for governance, labor, and the environment, they still involve conditions and provide cheaper finance with longer maturities than markets.9 Whatever the precise content, conditionality makes official loans more controversial and difficult to implement than using condition-free private finance.
This is why World Bank technical debt management guidelines group official and private options together when identifying choices borrowing countries face.10 While private investors encourage certain policies and pay attention to a few key macroeconomic indicators,11 these affect pricing rather than the very availability of finance. Indeed, left governments, which might be expected to pursue policies markets do not support, have no trouble attracting portfolio investment.12 Private lender expectations are also less overt and intrusive than the conditions imposed by official lenders.13 Differences between official lenders are important and addressed by those cited above. But basic similarities, rooted in the presence of conditions, mean they belong together vis-à-vis markets in the MIC context.
Alongside these official financing resources, MIC creditworthiness means they have some degree of private market access.14 This includes bond markets in various locations and
8 Woods 2008; McKinnon 2010; Bräutigam 2011; Bräutigam and Gallagher 2014; Mattlin and Nojonen 2015; Humphrey 2015; Wang 2016; Bräutigam and Hwang 2016. 9 See Tables 1a and 1b. 10 Wheeler 2004, 18–19; World Bank 2015b, 14; 40–41. 11 Mosley 2003, chap. 4. 12 Frot and Santiso 2013, 42–44. 13 As Kaplan and Thomsson 2017 point out, highly indebted borrowers may see these market or private expectations as stringent conditions and change behavior accordingly. But this occurs only at high debt levels. The theory presented below also predicts change in borrowing policy at unusually high levels of borrowing. 14 Gurria and Volcker 2001; Fallon et al. 2001; Loser 2004; Hostland 2009; World Bank 2017, 9; World Bank 2012, para. 11.
13 commercial banks or investment firms. Although their interests are not identical, banks and bond-market investors have in common a different profit motive, pricing approach, and risk management rationale than official creditors.15 Again, despite differences within official and private creditors, they share fundamental similarities in juxtaposition to official credit options.
While this is a useful assumption that matches debt managers’ and international financial institutions’ views of MIC financing options, Appendix D2 deconstructs this official-private binary and tests multilateral, bilateral, bond, and bank options individually to illustrate the following argument’s robustness.
This range of financing options puts MICs in a different position in the global financial system than poorer Low Income Countries (LICs).16 To visualize this point, graph one plots the average percentage of external borrowing form official rather than private creditors in LICs vis-
à-vis MICs.
Graph 1: Average External Borrowing: MICs vs. LICs
100%
90%
80%
70% Avg. % Official of External Borrowing Avg.
60%
1990 1995 2000 2005 2010 2015 Year
LICs MICs
15 Tomz 2007, 23–26; Mosley 2003; Loser 2004; Thompson and Runciman 2006. 16 Loser 2004; Hostland 2009. For thoroughness, Appendix H shows the overwhelming use of official credit in LICs.
14 This position means MICs face a choice between official and private finance and the benefits and risks of each. Official benefits include lower interest rates, longer maturities, and easier restructuring. Conditions are the contentious elements of official loans, although conditions may at times reflect policies preferred by the borrowing government. The benefit of private finance is autonomy because it does not come with conditions. Risks are higher interest rates, shorter maturities, and rescheduling difficulty. In essence, the tradeoff is about whether a government prioritizes price or autonomy at the cost of constrained policies or more expensive finance. The tradeoff is detailed here.
The Official-Private Tradeoff
The core benefits of official credit are price related. First, official creditors offer lower- than-market interest rates. Second, official creditors offer longer maturities. Indeed, the World
Bank and other official lenders aim to “offer loans that are more competitive and flexible than other financing options in international markets.”17 Tables 1a and 1b show the average interest rate and maturity on new MIC borrowings from official and private creditors from 1990-2015.
Most MICs use a mixture of official and private credit most years, meaning these tables present a relatively selection-free picture of the different prices and maturities MICs get from each type of creditor.18 Notably, Tables 1a and 1b show differences between creditor prices and maturities persist through the period of low global interest rates following the 2008 financial
17 World Bank 2017, 9; Gurria and Volcker 2001; Loser 2004; Griffith-Jones, Griffith-Jones, and Hertova 2008; Humphrey and Michaelowa 2013; Humphrey 2014; Bräutigam 2011, 758–759. 18 Lesotho is the only MIC in the period under study here to always use only one creditor type (official). As noted later, Lesotho is removed from the main analysis due to its self-selection into using official credit but also included in Appendix D1 models for robustness check purposes.
15 crisis. This is not surprising since official lenders tie their rates to LIBOR, ensuring a gap between themselves and markets persists as global benchmark rates change.19
Third, official creditors are also more open to debt restructuring than markets. While this reflects their role in crisis management, flexibility is not only limited to times of crisis. Official lenders also emphasize flexibility before crises arise.20 This is all the more important given the difficulty of restructuring negotiations with private financiers and the rise of vulture funds that strategically and explicitly do not restructure.21
In turn, the core benefit of private finance is that it is condition-free. Official credit comes with conditions that constrain borrowers’ policy space across a range of areas.22 Economic conditions are traditionally associated with the Washington Consensus or “good” orthodox economic policies and many agree any moves away from this paradigm are marginal.23
Importantly, however, such economic policy prescriptions that force adjustment on national economies are only one way conditionality limits borrower autonomy. Lenders not associated with promoting liberal economic orthodoxy often tie loans to use of lender inputs, companies, and labor.24 Whether conditions restrict macroeconomic, production, or other policies, they are controversial parts of official credit because they force adjustments that MIC citizens and groups may resist.
19 See a variety of publicly available World Bank, Asian Development Bank, African Development Bank, Inter- American Development Bank, European and other loan handbooks and procedures. On China see Bräutigam 2011, 758–759 and Bräutigam and Gallagher 2014. 20 For examples, see World Bank 2017, 59; African Development Bank 2009, 20; Asian Development Bank 2014, 4. See Drezner 2014 for a recent example of official creditors’ importance during crises. 21 Josselin 2009; Thompson and Runciman 2006; Gallagher 2012. 22 Some touchstones and reviews in a vast literature include Collier et al. 1997; Babb and Carruthers 2008; Dreher 2009. 23 Williamson 1990; Wade 1996; Wade 2002; Broad 2006; Headey 2009; Park 2009; Fine 2009; Babb 2013; Best 2014; Humphrey 2015; Mattlin and Nojonen 2015; Stubbs, Kentikelenis, and King 2016. See McKinnon 2010 on the complementarity of any emergent ‘Beijing Consensus.’ 24 Mattlin and Nojonen 2015; Bräutigam 2011, 760.
16 There are other benefits to each creditor type. For example, official loans include technical assistance for implementing conditions. Private finance arrives faster because it comes without conditions, while official loan negotiations can take months or even years.25 This underlines the idea that official credit can lead to significant political transaction costs. It is only worth obtaining cheaper official credit and technical assistance if the negotiations are likely to end without forcing unpopular adjustment on key domestic groups. In short, these additional considerations reinforce the more fundamental tradeoff between price benefits and policy autonomy.
25 Humphrey and Michaelowa 2013; Ratha 2001.
17 Tables 1a & 1b: Annual Average Interest Rates and Maturities of New MIC Debt
Table 1a: Average Interest Rate on New External Debt in MICs 9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Private Creditors Official Creditors
Table 1b: Average Maturity for New External Debt in MICs 35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Private Creditors Official Creditors
Sources: World Development Indicators Notes: Average Interest Rates in %; Average Maturities in Years
18 IPE of Finance: Lacking Borrower Autonomy
Given this tradeoff, how do MICs choose which external creditors to prioritize? Why would one MIC prefer official creditors price benefits and policy constraints while another favors more expensive but condition-free private options? Dominant IPE of finance theories do not shed much light on these questions.
To begin, much theorization and research on the politics of sovereign debt address issues other than borrowing choices. Studies of government intervention in fund allocation after credit arrives in both public and private sectors, reasons borrowers repay debts at all, reasons borrowers comply with conditions, reasons for default, and restructuring negotiations after default do not get at the issue of which creditors governments use in the first place.26 Much important work on debt, then, studies behavior after loans have been made. This study seeks to understand the decision to borrow in the first place.
Of work that analyzes financial transactions as the unit of analysis, IPE is typically concerned with the lender side. Borrowing governments are often assumed to be price-takers with minimal impact on financial flows vis-à-vis lenders or markets, perhaps because official and private lenders are normally studied in isolation rather than as alternatives or substitutes available to borrowers. While a small collection of researchers allow for borrower autonomy in their models, this study is different in that it: (1) delimits MICs as a unique class of borrower, (2) specifies the dependent variable to group major financing alternatives by their benefits and risks, and (3) argues partisanship is a key factor.
26 On each topic, see Frieden 1991; Tomz 2007; Girod and Tobin 2016; Stasavage 2003; Aggarwal 1996.
19 This section first reviews IPE theory and research that explains financial outcomes by studying lenders. It then notes the few who consider space for borrower autonomy and locates this study within that group.
Market and Lender Power
As explained above, MICs can draw on official and private sources of finance when borrowing externally. IPE theory and research of both flows typically emphasize lender and market power. On the official side, bilateral loans across regions are almost strictly seen as products of lender interests.27 But there is debate about why multilateral development banks lend to certain borrowers and why loan conditions and sizes vary.
Many focus on powerful member-states. American interests and influence is a common explanation for the destination, size, and conditions of large Western multilateral loans.28 Some identify similar influence by China or Japan in Asian multilaterals.29 Many suggest these powerful member-states use their influence in multilateral lenders to obtain gains in security issues at the United Nations Security Council.30 Alternatively, coalitions of donors may shape lending insofar as powerful members censor their influence to gain efficiency and stability.31
Powerful member-state influence is not the only possible lender-driven explanation of multilateral loans. Others argue multilateral lending, especially conditionality, is driven by internal factors such as ideology, staff education, or operational inertia. Such arguments have been used to explain both stasis and change at multilaterals.32 They have also explained the size
27 Dreher, Nunnenkamp, and Thiele 2011; Frot and Santiso 2011. 28 Wade 2002; Fleck and Kilby 2006; Kilby 2009; Stone 2011. 29 Bräutigam and Gallagher 2014; Woods 2008; Kilby 2006; Lim and Vreeland 2013. 30 Dreher, Sturm, and Vreeland 2009a; Dreher, Sturm, and Vreeland 2009b; Lim and Vreeland 2013; Dreher, Sturm, and Vreeland 2015. 31 Lyne, Nielson, and Tierney 2006; Lyne, Nielson, and Tierney 2009. 32 Barnett and Finnemore 2004; Bøås and McNeill 2004; Chwieroth 2007; Chwieroth 2008a; Chwieroth 2008b; Chwieroth 2015; Weaver 2008; Park and Vetterlein 2010; Best 2014.
20 and conditionality of IMF loans.33 Whether the focus is powerful members or internal factors, these scholars emphasize lender interests and behaviors when explaining official loans.
On the private side, many study how markets set borrowing prices and the effects of that power.34 Developing borrowers such as MICs are seen as particularly susceptible to market perceptions because investors track more indicators more closely than they do for developed countries.35 MIC market access is also affected by the heuristic categories in which private investors place potential borrowers, reinforcing the sense that developing country borrowers can do little but borrow at the prices set by investors.36
Some argue democracies are one such group. In theory, democracies receive better rates because their institutions are more accountable to creditors, making them more likely to repay.37
This democratic advantage may specifically depend on indicators of good governance such as rule of law, independent courts, and property rights protection.38 Others challenge the democratic advantage. One study argues there is no significant interest rate difference across regime types.39
Another study suggests downgrades are also harmful to autocrats, so the incentives to repay are similar across regime types.40 These different arguments about how markets and investors set prices are crucial studies but do not consider borrowers’ abilities to use or not use markets.
Related but more expansive than focus on investor interests are globalization arguments that suggest states can do little in the face of any market.41 This applies to developing countries in particular because “growing integration with the world economy has constrained government
33 Nelson 2017. 34 Mosley 2003. 35 Ibid., chap. 4. 36 Brooks, Cunha, and Mosley 2015. 37 Schultz and Weingast 2003; Beaulieu, Cox, and Saiegh 2012. 38 Biglaiser and Staats 2012. 39 Saiegh 2005. 40 DiGiuseppe and Shea 2015. 41 Cerny 1994; Strange 1996; Strange 1998; Sassen 2006, Chapter 4.
21 choices with respect to international financial policy.”42 This entirely removes national autonomy insofar as MIC behavior would be expected to converge according to its degree of access to markets. Indeed, the willingness to lend to credit-hungry countries regardless of risk level may be unstoppable.43
Limited Borrower Autonomy in IPE
Above are the most common theoretical approaches to loans and sovereign debt in IPE.
They emphasize the role of lenders and markets when studying financial transactions. Perhaps because official and private lenders are often studied in isolation, borrowers are seen as having little control over financial outcomes. A smaller group of IPE scholars implicitly or explicitly allow theoretical room for borrower autonomy.
The foundations of borrower autonomy are built on borrowers’ policy preferences and the ability to shop among official creditors. The ability of developing countries to say “no” to official finance has roots in the development economics literature.44 The first major IPE study to consider developing country preferences also focused on official credit options, arguing developing countries would choose policy autonomy over wealth when borrowing.45
Indeed, alignment with or against official lenders’ policy preferences and thus conditions is where borrower autonomy has the most traction in IPE. Ngaire Woods has suggested official lenders extend credit when “willing interlocutors,” or bureaucrats who agree with conditions, hold positions in borrower governments.46 Vreeland makes a similar argument but gives more agency to borrowers, arguing they will use the IMF when they need a scapegoat for negative
42 Haggard and Maxfield 1996, 211. 43 Reinhart and Rogoff 2009. 44 Helleiner 1979. 45 Krasner 1985. 46 Woods 2006.
22 adjustments caused by policies it prefers.47 Putnam agrees “domestic conservative forces [may exploit official lenders] to facilitate policy moves that were otherwise infeasible internally.”48
This line of explanation based on pre-existing borrower policy preferences hints at the role of partisanship in MIC borrowing decisions. This is unpacked much more later in this chapter.
More recent work has suggested other factors that may shape borrowing. Humphrey and
Michaelowa suggest developing countries “shop” from official options based on conditions as well as differences in price, negotiation hassle, and the time it takes for funds to disburse.49 Their study is limited to South America and only covers official options. However, it is one of only two studies devoted to developing country borrowing choices, calling attention to the same premise supported here: given a variety of financing options, “explanations of… lending that ignore demand [seem] unlikely to be realistic.”50
The other study that takes borrowing choices seriously suggests sectoral coalitions shape choice of official creditors, particularly between China and Western lenders.51 Although the most expansive study on borrowing decisions, it is also limited. By including all LICs and MICs in the analysis, it implicitly assumes they face the same borrowing options and constraints. As shown above, this is not normally the case. It is also primarily concerned with “traditional” and
“BRICs” lenders. Focus is again on official options. Markets are included in the dependent variable, but as an equivalent to a number of individual official sources. The view here is that it is useful to group private sources vis-a-vis official sources because they represent fundamentally different benefits and risks, again as illustrated in the first section.
47 Vreeland 2003a; Vreeland 2007, 62–66. 48 Putnam 1988, 457. 49 Humphrey and Michaelowa 2013. 50 Ibid., 143. 51 Bunte 2013a.
23 In sum, these suggest borrower policy preferences and the ability to shop likely underpin
MIC external borrowing choices. These are important foundations for this study. Shortcomings to address are three-fold. First, they combine LICs and MICs. This is misleading because these two groups do not face the same financing options. Second, none specify that MICs are a particular class of borrower than can access either official or private sources. Third, despite older work hinting at the importance of ideological alignment with official creditor conditions, none have explicitly theorized and tested the effect of partisan economic ideology on borrowing decisions. This study will address all three of these shortcomings.
Conclusion: Looking to Partisanship to Explain MIC Borrowing Policy
The IPE literature that does consider the borrowing side of transactions shows both the ability to shop and alignment of policy preferences with official creditors underpin borrower decisions. On the first, MICs have a set of options when borrowing externally so there is some degree of autonomy. On the second, the economic policy preferences of MIC governments are likely to shape attitudes toward official external financing options. The question then becomes: what domestic political factors determine borrowing preferences? I argue partisanship affects
MIC borrowing preferences because it signals the economic ideology and core constituencies of the governing party.
While IPE has long focused on how various domestic political relationships affect foreign economic policy making in developed countries,52 in developing countries like MICs the relationship between government and major domestic groups is crucial for thinking beyond
52 Katzenstein 1978a.
24 globalization and policy convergence.53 This is true across regime types and policy areas.54
While distributional demands of democratic regimes in developing countries may be obvious,55 the same implications exist for autocratic regimes. This is because authoritarian regimes need to secure survival by ensuring policy generates material benefits for and cooperation from key domestic groups.56 For autocrats, nominal institutional constraints or overt distributional benefits through rent sharing can yield the necessary support.57 The distributional consequences of economic policy are thus a central concern for authoritarian as well as democratic governments.58
Partisanship captures the different constituents MIC governments must serve. Partisan divisions and different policy aims persist in the global economy across the developed and developing world.59 In MICs partisan politics are associated with class because as MICs grow
“the class content of politics also grows, as both capital becomes more powerful and an emerging working class is likely to assert its rights.”60 MIC partisanship thus usefully falls on a spectrum of right (capital) to left (labor), depending on a party’s constituency and economic agenda.
Hypothesizing partisanship shapes borrowing preferences brings comparative development to important IPE work cited above that, although it is mostly limited to the IMF context, suggests economic ideology shapes borrower openness to loan conditions. While
“domestic conservative forces [may exploit official lenders] to facilitate policy moves that were
53 Evans 1979; Evans 1995; Frieden 1991; Migdal, Kohli, and Shue 1994. 54 Haggard and Webb 1993, 144–148; Geddes 1994; Evans 1995, chap. 3; Rudra and Haggard 2005; Gandhi and Przeworski 2007a; Bueno de Mesquita and Smith 2010; Golden and Min 2013; Dasandi and Esteve 2017. 55 Golden and Min 2013. 56 Haggard and Webb 1993, 144–148; Geddes 1994; Evans 1995, chap. 3; Rudra and Haggard 2005; Gandhi and Przeworski 2006; Gandhi and Przeworski 2007a; Bueno de Mesquita and Smith 2010; Blaydes 2011. 57 Levi 1989; Gandhi and Przeworski 2007a; Wright 2008a. 58 For examples of this in MICs Mexico and Egypt, see Magaloni 2006; Blaydes 2011. 59 Quinn and Inclan 1997; Garrett 1998; Levitsky and Roberts 2011; Cameron and Hershberg 2010; Pinto, Weymouth, and Gourevitch 2010; Pinto 2013; Sandbrook 2014, chap. 2. 60 Kohli 2004, 416.
25 otherwise infeasible internally,”61 other MIC governments may not agree with nor have the political space to accept conditions, incentivizing use of alternative financing options. Even when forced to go to the IMF during crises, left governments prioritize minimal labor conditions, signaling the strength of the link between domestic constituencies and external finance.62 When borrowing, governments must consider whether and how conditions force adjustments on those affected by externally-imposed trade, privatization, fiscal, procurement, or other policies.63 This applies to both multilaterals and bilateral arrangements.64
In addition, the affinity of the left to global markets is an increasingly common finding in political economy research on developing countries. The left supports opening to FDI markets because such policy attracts investment and increases job opportunities.65 In domestic financial market development, the left supports investor protections for the same reasons.66 Such policy preferences are likely one reason left governments do not face challenges attracting portfolio investors.67 Although imperfect comparisons, partisanship shapes developing country policy approaches to different markets, be they trade, portfolio investment, or public debt markets. For a small and recent group of specialists, this study’s finding may not be as counter-intuitive as it is for generalists.
Finally and somewhat separately, partisan effects on borrowing preferences and thus foreign economic policy have implications for thinking about effective dent management in developing countries. In much of the literature, effective economic ministries are often discussed under the lens of autonomy. In other words, the most effective economic ministries are those that
61 Putnam 1988, 457; Vreeland 2003a; Vreeland 2007, 62–67. 62 Caraway, Rickard, and Anner 2012. 63 Best 2014, 102–105; Fine 2009; Babb 2013; Bräutigam 2011; Navia and Velasco 2003; Rodrik 2006. 64 Best 2014, 102–105. 65 Pinto 2013. 66 Pinto, Weymouth, and Gourevitch 2010. 67 Frot and Santiso 2013, 42–44.
26 are more independent from politics because independence from politics allows them to make policy with an eye to medium- and long-term macroeconomic stability. The most common example of this is work on central banks.68 However, the partisan political constraints on debt management identified in this study or not only inescapable, they are to some degree legitimate.69 This reality means autonomy is not a useful lens for assessing DMOs’ ability to manage debt, nor is autonomy a practical goal for practitioners seeking to increase their ability to manage debt sustainably. Instead, transparency provides a more practical framing for effective
DMOs. This policy proposition is unpacked in detail in the final chapter.
The next chapter traces the borrowing process in MICs to illustrate how this effect occurs in practice. It then details the partisan external borrowing theory and hypothesis, before econometrically testing the effect of partisanship on external borrowing choices. Later chapters compare country case studies to reinforce these claims about partisan borrowing processes and decisions in MICs.
68 Cukierman, Webb, and Neyapti 1992; Debelle and Fischer 1994; Fischer 1995; Bernhard, Broz, and Clark 2002; Gavin 2018. 69 Wheeler 2004; World Bank 2015b.
27 Chapter 3: Theory and Quantitative Analysis
Introduction
Middle Income Country (MIC) governments have options when borrowing externally.
They are poor enough to access official finance from multilateral and bilateral development institutions but also creditworthy enough to access private finance from bond markets and banks.
These options provide different benefits and risks. Official finance comes with low interest rates, long maturities, and flexible restructuring processes, but includes conditions. Private finance is condition-free but more expensive, shorter-term, and harder to restructure. MICs thus face a tradeoff between the price benefits of official creditors and the autonomy benefits of private creditors when borrowing abroad.1 The tradeoff means financing choices shape state capacity, fiscal space, debt sustainability, policy autonomy, and thus MIC development prospects.2
Why do MICs use different external creditors, taking on different benefits and costs?
Borrowing can enhance and sustain MIC state capacity to contribute to economic and social development, but debt can also lead to unfulfilled aspirations or crises. Indeed, debt is “crucial to all economies… but balancing the risk and opportunities of debt is always a challenge.”3 Since different external creditors have different effects on national debt sustainability, fiscal space, and policy space, borrowing choices are pivotal policy decisions that shape MIC development prospects.4 Yet, as discussed in the previous chapter, most explanations of developing country
1 See Gurria and Volcker 2001; Fallon et al. 2001; Loser 2004; Hostland 2009; World Bank 2012; World Bank 2017. 2 On the importance of fiscal and investment state capacity in developing countries, see Gerschenkron 1962; Evans 1979; Evans 1995; Kohli 2004; Wade 1990; Frieden 1991; Rudra 2008; Nooruddin and Rudra 2014; International Monetary Fund 2018a. On official and private debt-related effects on state capacity, see Mosley 2003; Wibbels 2006; Reinhart and Rogoff 2009; Reinhart, Reinhart, and Rogoff 2012; Dreher and Gassebner 2012; Bastiaens and Rudra 2016. 3 Reinhart and Rogoff 2009, xxv. 4 On the importance of fiscal and investment state capacity in developing countries, see Gerschenkron 1962; Evans 1979; Evans 1995; Kohli 2004; Wade 1990; Frieden 1991; Rudra 2008; Nooruddin and Rudra 2014. On official and private debt-related effects on state capacity, see Mosley 2003; Wibbels 2006; Reinhart and Rogoff 2009; Reinhart,
28 sovereign debt focus on the supply side of transactions and cannot explain MIC borrowing preferences.
This chapter develops and quantitatively tests a theory of MIC external borrowing choices. It argues that right-leaning governments are more likely to use official credit and left- leaning governments are more likely to use private credit. This is because right governments prefer the policies and aims of official loan conditions in the first place, allowing them to take advantage of official creditor price benefits. Left government constituents resist conditions, incentivizing use of condition-free but expensive market finance. The only time this partisan effect does not exist is at extremely high budget deficit levels. In such instances, right-leaning governments are forced to use markets more than they would otherwise to cover unusually large financing needs.5 Econometric models controlling for global and national economic conditions as well as supply side factors lend strong support to this argument.
In practice, partisanship shapes MIC borrowing preferences because it signals the economic ideology and core constituencies of the governing party. Official and private options have implications for domestic groups, meaning governments must borrow on terms and conditions that do not force excessive adjustment on constituents. This constrains the ability of debt management offices (DMOs) in finance ministries to manage debt accumulation in an apolitical fashion.
This argument has important implications. First, it delimits MICs as a class of borrowers with a particular set of options, granting them autonomy in the global financial system. Second,
Reinhart, and Rogoff 2012; Dreher and Gassebner 2012; Gunter, Rahman, and Shi 2009; Ncube and Brixiová 2015; International Monetary Fund 2016. 5 While right governments may also be expected to maintain minimal deficits, revenue challenges or global economic conditions can have detrimental impacts on even conservative government budgets in MICs. See Baunsgaard and Keen 2005; Wibbels 2006; Bastiaens and Rudra 2016. Others point out how moral hazard problems ensure markets are available in such times. See Jeanne and Zettelmeyer 2001; Wyplosz 2017.
29 integration into that global financial system varies by partisan domestic politics.6 Third, while diversified use of financial options may be prudent, autonomy means such strategies cannot be imposed from the outside. Borrowing policies must work within the policy space set by MIC partisan politics. The international financial system, including official creditors, can only buffer
MIC governments and citizens from the “vagaries” of global financial markets if domestic politics allows it to do so.7
The previous chapter detailed the tradeoff MICs face when borrowing externally. This chapter begins by detailing the relationship between MIC budgets, borrowing processes, and partisanship. It then outlines a theory of how partisanship shapes borrowing in this context. The majority of the chapter focuses on econometric test design and results.
MIC DMOs and Borrowing Processes
MIC borrowing decisions are part of annual budget processes. Budgets give rise to financing requirements, the amount that MICs must borrow to cover the gap between revenues and spending. Debt management offices (DMOs) are responsible for borrowing to cover these requirements. DMOs are located in finance ministries, as borrowing is a key component of central government fiscal administration and cash management.8 Whatever financing requirement emerges from the budget process, a MIC DMO must identify “all potential external creditors and markets” and borrow “from official sources… or from commercial creditors” to finance the budget.9 It is crucial to highlight two points about DMOs and borrowing.
6 For a similar argument in the context of FDI, see Pinto 2013. 7 For discussion see Ruggie 1982, 403; Pauly 2009. 8 World Bank 2015b, 6–7. Page 7 notes central banks may at times conduct routine domestic bond auctions, but this is done in coordination with and on behalf of the finance ministry debt office’s operations and strategy. See also Wheeler 2004, 31–33 and 42. 9 World Bank 2015b, 41; Wheeler 2004, 18. This includes sovereign guarantees. While often accounted as contingent liabilities, guarantees are part of the financing requirement DMOs must account for when borrowing.
30 First, this borrowing decision is inherently political. In the words of World Bank debt management technical advisors, a “constraint to borrowing by the [DMO] is the retention by the parliament or congress of the power to ratify… loans raised abroad.”10 Private finance or a “loan from [an official creditor] that includes a range of policy implications clearly has political implications and may well be subject to political scrutiny without being qualified as undue political interference.”11 In other words, because MIC external borrowing choices necessarily have policy and distributional implications, political interference is expected.
This can lead to disagreement between politicians and DMO technocrats.12 But the political element of external borrowing decisions is inescapable. Debt managers must borrow
“within [political] parameters.”13 Further, political interference may be appropriate insofar as it enhances ownership of borrowing decisions and plans for fund use.14 This contrasts significantly with work on central bank independence and monetary policy.15 While DMO technocrats work to minimize risk within political parameters, borrowing decisions remain in the first instance a function of government preferences.
Second, borrowing is not strictly about the size of the financing requirement. On one hand, a surplus does not mean there is no borrowing. The need to manage cash and debt, including using favorable finance when perceived opportunities arise, means borrowing often takes place with balanced budgets and surpluses. On the other hand, deficits do not mean countries must rely on a certain type of creditor. As projects, programs, and state-owned enterprise loans or guarantees are planned, the DMO is part of such discussions and negotiates
10 World Bank 2015b, 10. 11 Ibid., 14. 12 Wheeler 2004, 50–51; World Bank 2015b, 13–14. 13 World Bank 2015b, 13. 14 Ibid., 14. Among a large literature on ownership, see Dreher 2009, 235; Best 2014, chap. 5. 15 Among a vast literature, see Debelle and Fischer 1994.
31 with official creditors and private investors through the year.16 After DMOs aggregate financing options, the ultimate borrowing decision is shaped by the political factors described above.
The only time financing requirements dominate borrowing decisions is if the MIC faces an extremely large primary budget deficit and financing requirement. Under such conditions the
DMO must borrow comparatively large amounts in absolute terms, requiring use of creditors they may not use otherwise. Notably, studies show private finance remains available as borrowing needs increase because moral hazard on both supply and demand sides sustain market availability and use.17
The size of financing requirement at which this occurs is unclear.18 Many MICs have budget rules and debt limits, implying deficits are concerning if a country cannot move to surplus in the medium term.19 But enforcement issues abound and limits vary by country. The closest guide is the World Bank and IMF’s LIC-focused debt sustainability frameworks that “inform
LICs’ fiscal policy and borrowing decisions” by setting debt thresholds based on country- specific contexts, but this covers LICs.20 Regardless, at some borrowing amount, DMO behavior changes because the size of the financing requirement dictates the DMO use creditors it would not otherwise. This study’s results shed light on this issue.
Partisan MIC External Borrowing
The question becomes, then, what determines the external creditors MIC governments are likely to prefer when not facing such large financing requirements? The theory here is that
16 World Bank 2015b, 41. 17 Jeanne and Zettelmeyer 2001, 7–10; Gelos, Sahay, and Sandleris 2011; Wyplosz 2017, 22. 18 Wyplosz 2011; Tanner 2013. 19 Schaechter et al. 2012; Lledó and Poplawski-Ribeiro 2013; Lledó et al. 2017a; Hamilton and Flavin 1986 is a touchstone on the topic, though it analyzes the US. 20 International Monetary Fund 2018b, 5.
32 government partisanship shapes external borrowing preferences. This is because different external financing options affect constituencies differently, leading governments to prefer finance from sources that do not force unwanted adjustment on partisan constituents.
Partisanship captures the different constituents MIC governments must serve. Partisan divisions and different policy aims persist across the developed and developing world.21 In MICs partisan politics are associated with class because as MICs grow “the class content of politics also grows, as both capital becomes more powerful and an emerging working class is likely to assert its rights.”22 MIC partisanship thus usefully falls on a spectrum of right (capital) to left
(labor), depending on a party’s core constituencies and economic agenda.
In class terms, right parties are “associated with policies that benefit owners of capital”23 as capital owners “mold state intervention in its own favor.”24 This means right-leaning parties are not likely to resist official credit in the external borrowing tradeoff, primarily because conditions either promote “good” market-oriented policies or benefits associated with closer ties to lenders’ markets. Moreover, capital values fiscal responsibility and debt sustainability, objectives served by official creditors’ lower interest rates and longer maturities. It is important to note that while right governments may be expected to minimize deficits and borrowing needs, revenue challenges, economic cycles, and global conditions can lead to substantial financing requirements in even the most conservative MICs and across regime types.25
In turn, it “is uncontested that [left] parties prefer policies that benefit workers.”26 Left parties’ major constituents are those dependent on government spending and on labor unions for
21 Garrett 1998; Cameron and Hershberg 2010; Levitsky and Roberts 2011; Pinto 2013; Pinto, Weymouth, and Gourevitch 2010; Quinn and Inclan 1997; Sandbrook 2014, chap. 2. 22 Kohli 2004, 416. 23 Pinto 2013, 32. 24 Kohli 2004, 417. 25 Bastiaens and Rudra 2016; Baunsgaard and Keen 2005; Wibbels 2006. 26 Pinto 2013, 32.
33 protecting their position in globalized markets.27 Accordingly, left parties are likely to resist official creditors’ conditions that can either bring policy or project and production adjustments that expose left constituencies. They are likely to prefer private external finance because markets and commercial banks do not intrude on these groups as a condition for receiving funds. This is why official lenders find programs are “politically difficult to launch and, once launched, to keep afloat” when they impose loses on domestic groups to which borrower governments are
“sensitive.”28
Domestic business at times constitutes centrist elements of left parties, insofar as they seek insulation from global markets and an interventionist role for the state in development.29
This means official loans conditional on price liberalization, tying production to foreign inputs, or other adjustments can hurt domestic business and the middle class as much as labor. In political economy studies, the center has been attached to both the right and left depending on the policy area under analysis.30 Here, center and left are pooled because relatively popular and interventionist preferences are theorized to yield views of official lender conditions that are significantly different from the preferences of right constituencies. In other words, centrist governments are likely to be more resistant to conditions than right governments due to their broader constituent base. Following many of the above works that test partisanship, this study’s empirical tests at times remove centrist MICs from the analysis to ensure coding of centrist governments do not determine findings.
The theory applies across regime types, as economic policy and thus partisanship varies in autocracies as well as democracies. This is because the distributional consequences of
27 Garrett 1998; Quinn and Inclan 1997; Cameron and Hershberg 2010; Pinto 2013, 32; Sandbrook 2014, chap. 2. 28 Haggard and Webb 1993, 193–194. 29 Kaufman and Segura-Ubiergo 2001; Kingstone and Young 2009, 32; Sandbrook 2014. 30 compare above with Pinto 2013; Kurtz and Brooks 2008; Vaaler, Schrage, and Block 2006.
34 economic policy are as much a concern for autocrats as democrats.31 Indeed, the data below includes left and right authoritarian governments. Left-leaning authoritarian MICs include years in Algeria, China, Congo, Laos, Namibia, Turkmenistan, Tunisia, Uzbekistan, and Vietnam.
Right-leaning authoritarian MICs include years in Croatia, Kyrgyzstan, Lebanon, Nigeria, Peru,
Paraguay, Russia, Senegal, and South Africa.32 More generally, varied partisanship in autocracies as well as democracies reflects the general concern for regime survival that requires government policy to generate benefits for and cooperation from key domestic constituencies.33
Accordingly, borrowing decisions remain crucial policy choices in authoritarian regimes because the external borrowing tradeoff yields policy and distributional consequences.34 This also signals that while different time horizons for authoritarian and democratic regimes shape some areas of foreign economic policy,35 this does not apply here. If they did, the findings would depend on regime type. But the partisan effect persists whether regime types are combined or separated in the analysis.
There are two further points to emphasize about this theory. First, arguing partisanship shapes borrowing preferences builds on work that, although often limited to the IMF, shows economic ideology shapes borrower openness to loan conditions. While “domestic conservative forces [may exploit official lenders] to facilitate policy moves that were otherwise infeasible internally,”36 other MIC governments may not agree with nor have the political space to accept conditions, incentivizing use of alternative financing options. Even when forced to go to the IMF
31 Blaydes 2011; Magaloni 2006. 32 This combines partisan coding in Beck et al. 2001 with; regime type binary coding in Boix, Miller, and Rosato 2013. 33 Bueno de Mesquita and Smith 2010; Gandhi and Przeworski 2006; Gandhi and Przeworski 2007b; Haggard and Webb 1993, 144–148; Rudra and Haggard 2005; Wright 2008a. 34 Oneal 1994; Wright 2008b. 35 Blake 2013; Wright 2008b. 36 Putnam 1988, 457; Vreeland 2003b; Vreeland 2003a; Vreeland 2007, 62–67; Woods 2006; Nelson 2017.
35 during crises, left governments prioritize minimal labor conditions, signaling the strength of the link between domestic constituencies and external finance.37 When borrowing from either multilateral or bilateral options, governments consider whether and how conditions force adjustment.38
Second, the affinity of the left to global markets is an increasingly common finding in specialist research on developing countries. The left supports opening to FDI markets because such policy attracts investment and increases job opportunities.39 The left also supports investor protections that attract investment.40 Such policy preferences are likely one reason left governments do not face challenges attracting portfolio investors.41 Although imperfect comparisons, partisanship shapes developing country policy approaches to different markets, be they trade, portfolio investment, or the public debt markets analyzed here.
Partisan MIC Borrowing Hypothesis
In sum, partisanship affects MIC borrowing preferences because it signals the economic ideology and core constituencies of the governing party. Right governments will be likely to use more official creditors because conditions do not force adjustment on core constituents and price benefits aid their interests. Left governments will prefer to avoid official credit because conditions will likely force negative adjustment on key constituents. To avoid the political effects of this, left MICs are more likely to draw on private finance.
37 Caraway, Rickard, and Anner 2012. 38 Best 2014, 102–105. 39 Pinto 2013. 40 Pinto, Weymouth, and Gourevitch 2010. 41 Frot and Santiso 2013, 42–44.
36 The only time this partisan effect will not take place is if the financing requirement is high enough that all sources of finance are needed to cover the budget. In other words, at a certain level of financing requirement, left and right MICs are likely to draw on the same array of financial options out of necessity.
H1: Right-leaning MICs are more likely to use official external credit options, unless they face a
relatively high financing requirement.
Research Design
If external borrowing decisions are at least in part a function of partisanship, MIC use of official and private external financial options should covary with government partisanship. To test this, a country-year panel dataset of MICs from 1990-2015 was constructed to test the effect of partisanship on MIC external borrowing. Appendix A lists country-years in the choice Table 1 model. Appendix B summarizes variable sources. Appendix C provides descriptive statistics for the choice Table 1 model.
Dependent Variable
To test why MICs prioritize official and private sources of external finance differently, the dependent variable in this study is the annual percentage of official credit commitments over total external commitments. Higher values thus indicate a greater share of the country’s external debt came from official sources that year. It is useful to note loans from any official lender government agency are included in this dependent variable. Indirect loans to the private sector, or loans that do not affect central government finance and guarantees, are not included. See
Appendix B for more data information.
37 Using commitments ensures analytical focus is on the contracted amount in a given year.
While commitments may be disbursed in parts over subsequent years, the theory above addresses the effect of MIC partisanship on choosing sources of finance. Sometimes funds remaining from a previous government’s commitments are disbursed under a new government, making measures of disbursement less representative of this question and theory than commitments. The question is how partisanship affects the mixture of official and private credit agreed to each year.
It is useful to emphasize that although the total amount borrowed is the dependent variable’s denominator, this does not automatically mean more borrowing leads to a greater share of private financing. MICs can combine financing from a variety of official sources to meet financing requirements should they prefer the benefits and costs of that approach. As the theory states, it takes an unusually high deficit level for borrowing amounts to force governments to use creditors they would prefer to avoid.
Independent Variables
This study tests the hypothesis that right-leaning MIC governments are more likely to use official credit unless the MIC has such a high deficit that right-leaning governments must draw on markets more than they would otherwise. This means the interaction of two explanatory variables is the focus of these quantitative tests.
First, government partisanship is coded using the Database of Political Institutions.42 The data is particularly useful here because partisanship is based on the economic policy from the governing party’s platform.43 As noted in the discussion of partisanship above, regardless of regime type the variable hones in on the economic preferences of the borrowing government.
Following Pinto’s use of the same data, the variable is coded by the government branch that most
42 Beck et al. 2001. 43 Cruz, Keefer, and Scartascini 2016.
38 controls policy, i.e. the majority party in parliamentary systems and the executive party otherwise.44 Right Govt is coded as 1 for right governments and 0 otherwise, as center and left are pooled in the theory. Sensitivity of results to this pooling is also tested below.45
Second, the financing requirement is drawn from the World Bank’s World Development
Indicators (WDI). The financing requirement is the gap between primary budget revenues and spending. In other words, it is the amount of money a MIC must borrow on top of revenues to fund the budget.46 Accordingly, Fin Req is the annual ratio of revenues to expenditures. A value greater than 1 means the country is in surplus, a value of 1 is a balanced budget, and a value below 1 indicates the country faces a deficit. When in deficit, Fin Req indicates what percentage of the budget is covered by revenues. In other words, 1 – Fin Req specifies the percent of the budget the government needs to borrow.
The two variables above are interacted in Right Govt x Fin Req to test the hypothesis that partisanship shapes external borrowing unless the country faces a high deficit.
Control Variables
The models control for a range of credit access, debt, economic, and political factors that could shape MICs’ external borrowing decisions. Credit Rating is based on Standard and Poor’s sovereign long-term ratings. A code of 1 means the country has a AAA rating, so higher values
44 Pinto 2013, 118. 45 To maintain a high N and because the hypothesis is about right governments specifically, governments with unclear partisan leanings are also coded as non-right in the majority of models. However, when dropped alongside Centrist governments, results not only persist but are stronger (see Table 1 Model 9). 46 An alternative measure of borrowing needs would be to add amortization and subtract some forms of FDI, though data transparency and incompleteness over time across many MICs makes focusing on more than the primary budget position difficult here see International Monetary Fund 2018b, n. 18..
39 indicate worse credit ratings. The simplest model controls only for Credit Rating since most other factors are to some degree built into sovereign credit ratings.47
Access to official lenders is in large part shaped by the strategic dimension of multilateral and bilateral lending. As detailed earlier, multilaterals of Western, European, East Asian, and regional stripes reflect the interests of powerful member countries, while bilaterals reflect national interests. While controlling for a variety of formal and informal influences across different official lenders is difficult, a common theme in research on large multilaterals is that the relationship between potential borrowers and the United States shapes access. Following those who measure this effect using United Nations voting,48 UN Vote is the percent of the borrowing
MICs’ UN votes aligned with the US.49 More alignment may indicate easier access to large official creditors under US influence and thus more official borrowing.
Another important resource for MICs is domestic finance.50 Domestic Credit is the size of a country’s domestic credit market as a percentage of GDP. MICs with deeper domestic markets may not need to borrow as much externally. It is not clear how domestic market depth may affect the type of external creditor a MIC would, but it is important to control for the role of domestic financial markets in MICs’ menu of financing options. Crises must also be controlled for since official credit is crucial in such periods.51 Crisis is a dummy variable coded as 1 if the MIC faced a debt, currency, or banking crisis at any point that year.52
47 To avoid losing an excessive number of observations due to some MICs not having ratings for many years, a country without an S&P rating that year is coded as being just above default, as they should still have better one-off access to markets than MICs in default but less access than countries that have sought out ratings. 48 among many examples, see Kilby 2009. 49 Bailey, Strezhnev, and Voeten 2017. 50 Reinhart and Rogoff 2009, chap. 8. 51 for example, see Drezner 2014, 139–140. 52 Laeven and Valencia 2012.
40 Politically, many argue democracies have better capital market access due to repayment incentives.53 While others disagree or show autocracies actually borrow more in aggregate,54
Democracy uses Polity IV to control for the argument that democracies have better market access and are more likely to use private sources.
Political business cycles may also affect borrowing, given the role of budgets in shaping
MIC financing requirements. Election periods can increase deficits in developing countries, as revenues sometimes drop and expenditures often increase.55 This may suggest private external finance is more likely before elections, though some find large official creditors are used more.56
Complicating cyclical effects further, some find post-election periods increase prices for new left governments, while others find post-election periods limit access to some private investors.57 To control for the range of possible effects, Political Cycle is the number of years until the next planned election.58
MICs’ debt profiles may also shape borrowing. The amount of debt being repaid in a given year may affect borrowing strategies. In addition, high levels of outstanding short-term debt may require use of markets for rollover purposes, while high reserve levels may alter the perceived tradeoff between official and private options. Debt Service, Short Term Debt, and
Reserves control for these possibilities.
Additional Variables and Observation Subsets in Appendices
Extensive robustness checks are reported in Appendix D. Testing disbursements rather than commitments does not alter the findings. Results are also robust to dropping IDA recipients,
53 Schultz and Weingast 2003; Beaulieu, Cox, and Saiegh 2012; Biglaiser and Staats 2012. 54 DiGiuseppe and Shea 2015; Oatley 2010; Saiegh 2005. 55 Brender and Drazen 2005; Shi and Svensson 2006. 56 Dreher and Vaubel 2004. 57 Vaaler, Schrage, and Block 2006; Frot and Santiso 2013. 58 Beck et al. 2001.
41 dropping country-years with conditional IMF loans, dropping countries in crisis, and dropping non-democracies. GNI growth, GNI size in absolute terms, and the capital account are omitted here in favor of more detailed debt-specific variables but are considered in Appendix D.
Country-specific external interest rates are also tested, though data issues relegate it to the appendix. Including Lesotho, the only MIC left out for self-selection purposes because it strictly uses official credit, does not change findings. Finally, Appendix D also deconstructs the dependent variable to test multilateral, bilateral, and bond market options individually. Although a deconstructed dependent variables removes essential information and does not reflect the theory, it is helpful to show that partisan effects persist when isolating different official and private financial options. See Appendix D notes for further discussion.
Appendix D1 controls for possible effects of Chinese government lending and politics, despite data limitations and its inclusion in the official side of the dependent variable. First, the amount of Chinese lending as well as a dummy for Chinese financial loans to the MIC that year are controlled for.59 Second, MIC alignment with China in UN voting is also tested.60 These variables and specifications do not alter results. Lastly, Appendix D2 shows that partisanship indeed does not affect LIC borrowing, showing the Adjusted Prediction plot of running the same
Table 1, Model 8 on LICs predicts much more use of official creditors in general and no statistical difference between left and right LIC governments.
Econometric Models
Table 1 reports nine core models of partisan external borrowing in MICs. Models 1-3 provide baseline estimations. Model 1 is a linear two-way fixed effects model with only credit rating and the lagged dependent variable as controls. Model 2 is linear two-way fixed effects
59 Dreher, et al. 2017. 60 Bailey, Strezhnev, and Voeten 2017.
42 model with all control variables. Including more controls decreases the N because detailed financial factors such as Short Term Debt and Domestic Credit are not available for some MIC country-years. Model 3 is a fractioned probit model that limits estimations to the inclusive range of the percentage dependent variable (0%, 100%) to account for possible non-linearity near each bound.61 These are merely baseline estimations because they do not account for the serial correlation inherent in this panel data. Nor are non-linear fractioned regression models reliable because incidental parameters make fixed effects inconsistent.
Accordingly, Models 4-9 use linear techniques appropriate for unbalanced panel data.
Linear models provide useful inferences when there is no theoretical reason borrowing behavior must change near the bounds of the dependent variable.62 Models 4-6 are Anderson-Hsiao first difference models that instrument endogenous regressors with their lagged values.63 Model 4 instruments only characteristics of the national debt portfolio, Debt Service and Short Term Debt.
Model 5 also instruments DV lag. Model 6 also instruments Credit Rating.
Models 7-8 report estimations using the choice technique, System Generalized Method of
Moments (GMM).64 GMM is preferred here for two reasons. First, the data is an unbalanced panel with gaps, as MICs may either not borrow in a given year or move into low or high income status for a period (which signals a different set of financing options) before returning to MIC status. First differencing to account for serial correlation in this setting would cause an unnecessary amount of data loss because at each gap the first observations would be lost. System
GMM allows for forward orthogonal transformations that average all future observations rather
61 Papke and Wooldridge 1996; Papke and Wooldridge 2008. 62 Gailmard 2014, 145. See Pinto 2013 for an application in political economy. 63 see Reed 2015. 64 Arellano and Bond 1991; Arellano and Bover 1995; Blundell and Bond 1998; Roodman 2009b; Roodman 2009a.
43 than differencing, which allows gaps in the data to not unduly affect the N.65 This is why the N is higher in GMM Models 7-8 than Anderson-Hsiao Models 4-6.
Second, GMM helps account for the fact that regressors in these specifications range in their endogeneity.66 Some regressors are fully endogenous because they are directly related to the error term and the use of multiple lags as an instrument addresses this. Other regressors are pre- determined but not strictly exogenous, making fewer lags sufficient for instrumentation. Other variables are clearly exogenous.
In this GMM application, Models 7-8 treat DV lag as fully endogenous, using up to five years of lags as instruments and then collapsing the instruments, minimizing the number of instruments and risk of over-identification.67 Model 7 treats Debt Service and Short Term Debt as pre-determined but not strictly exogenous because debt portfolio characteristics may be affected by previous borrowing choices. The appropriate treatment of Credit Rating is ambiguous, so
Model 7 treats that regressor as exogenous while Model 8 treats it as pre-determined but not strictly exogenous. All other political and economic regressors that do not directly relate to the debt portfolio are treated as exogenous.
Finally, to ensure coding decisions about partisanship are not responsible for the findings,
Model 9 drops all centrist governments. The model is the same as Model 8 with fewer observations. All models include country fixed effects and cluster-robust standard errors to capture unobserved heterogeneity across countries. All models also include year fixed effects to control for changes in the global economic and financial system, such as commodity price fluctuations or global interest rate trends.
65 Arellano and Bover 1995. 66 Roodman 2009b, 128. 67 Roodman 2009a.
44 The Data Generating Process
It is crucial to discuss how a MIC makes budget and borrowing decisions this year (t) that do not take effect until next year (t+1). In other words, budget deliberations and borrowing strategies are designed under the conditions and information known in year t, but flows do not occur until budgets and borrowing strategies are implemented in year t+1. This means the dependent variable and Fin Req must be led by one year because they reflect flows decided on throughout year t but not implemented until t+1. Leading is preferred to lagging here not only it because it reflects the policy-making process and the fact that flows occur after a year of deliberation, but also because it ensures only country-years where the borrower was a MIC during the policy-making process are included in the analysis. Political Business Cycle is also led by one year because, to the extent there is a political business cycle, the budget is made with an eye to what year in the cycle that budget is used. Ultimately, the most general model of borrowing in Table 1 is:
% Official Credit(t+1) = Right Govt + Fin Req(t+1) + Right Govt x Fin Req(t+1) + % Official Credit
+ Control Variables + Country FE + Year FE + e
Results
Estimations in Table 1, as well as those in Appendices D, D1, and D2, lend support to the hypothesis. Right-leaning MIC governments are more likely to use official credit unless it faces a very large deficit and financing requirement, around 20% of the budget.
All Table 1 specifications estimate the interaction of Right Govt and Fin Req is statistically significant in the expected direction. In GMM estimations, collapsing instruments
45 keeps the number of instruments lower than the number of groups (countries) and Difference-in-
Hansen tests show instruments do not overfit.68 While Hansen tests for Model 9 are less convincing because of the lower N, Model 9 is largely a robustness check to ensure core findings do not change when centrist governments are dropped.
In the choice Model 8 in Table 1, right governments are shown to increase use of official credit by 20%. Substantively this means that, all else equal, the debt portfolio shifts by 20% each year depending on government partisanship. The effect increases to 38% of total borrowing when centrist governments are dropped and Anderson-Hsiao estimations all fall in between this
20% - 38% range. While all Table 1 estimations show significance in the expected direction, inference about effect change across levels of MICs’ financing requirements requires plotting the interaction term over levels of Fin Req.69
Accordingly, Figure 1 plots adjusted predictions, or predicted probabilities for borrowing of different partisan governments across levels of Fin Req.70 It shows significant statistical difference between right and left government external borrowing strategies.71 Right MIC governments are more likely to use official creditors unless it has to finance more than 20% of the budget that year. This is strong evidence in support of the hypothesis: right governments are more likely to use official creditors unless they have an extremely large deficit and thus financing requirement. Figure 2 plots the same model’s adjusted predictions when centrist governments are dropped to show the findings do not depend on coding strategy.
As expected, DV lag, or the borrowing strategy in the previous year, affects borrowing this year. This is the only other regressor that shows a consistent significant effect across models
68 Ibid., 10–11; Roodman 2009b, 129. 69 Brambor, Clark, and Golder 2006. 70 These are also sometimes called predictive margins. See Williams 2012. 71 The full range in the data actually from .2 to 2.2, but is shortened in the figures to ease visualization.
46 and specifications. Interestingly, UN Vote, which is alignment with the US and may be expected to increase availability and use of large Western multilateral loans, shows significant correlation to more market use. The interaction’s lower order terms are reported but substantively unimportant. They show the effect of each variable when the other part of the interaction term is
0.72 This means Right Govt shows the effect of partisanship when the government has zero revenue, a case that never happens in reality. Fin Req shows the effect of the financing requirement when there is a non-right government, the reference against which the interaction term is tested. Again, all Appendix D and D1 robustness checks of the preferred GMM Model 8 show statistical significance in the expected direction with similar coefficients, which provides further validation of inferences.
72 Braumoeller 2004.
47 Table 1: Modeling the Partisan Effect on MIC External Borrowing Dependent Baseline Models Panel Models Variable = % Official Credit (1) (2) (3) (4) (5) (6) (7) (8) (9) RightGovt X Fin 0.228* 0.292** 1.117*** 0.343** 0.270** 0.265** 0.251** 0.199** 0.376** Req (0.094) (0.099) (0.325) (0.113) (0.093) (0.096) (0.087) (0.073) (0.138)
RightGovt -0.130 -0.160 -0.682* -0.195* -0.135 -0.131 -0.136* -0.103 -0.197*
(0.078) (0.082) (0.267) (0.093) (0.074) (0.076) (0.065) (0.056) (0.097)
Fin Req -0.003 0.004 -0.097 -0.013 -0.081 -0.083 -0.036 -0.043 -0.136
(0.101) (0.094) (0.301) (0.108) (0.097) (0.098) (0.059) (0.052) (0.103)
DV lag 0.168*** 0.185*** 0.539*** 0.165** 0.710* 0.723* 0.562** 0.733*** 0.490**
(0.041) (0.045) (0.130) (0.052) (0.336) (0.355) (0.179) (0.133) (0.188)
Credit Rating 0.015** 0.017** 0.060** 0.019** 0.008 0.006 0.011* 0.005 0.011
(0.005) (0.006) (0.021) (0.006) (0.007) (0.010) (0.005) (0.006) (0.008)
UN Vote -0.382 -1.279 -0.288 -0.191 -0.186 -0.279* -0.245** -0.492**
(0.234) (0.879) (0.246) (0.228) (0.229) (0.111) (0.089) (0.190)
Domestic Credit 0.001 0.003 -0.000 -0.000 -0.000 -0.001* -0.001* -0.001*
(0.001) (0.003) (0.001) (0.001) (0.001) (0.000) (0.000) (0.001)
Crisis 0.051 0.144 0.056 0.014 0.015 0.035 0.022 0.086
(0.038) (0.119) (0.039) (0.042) (0.042) (0.031) (0.030) (0.055)
Political Cycle -0.006 -0.020 -0.010 -0.002 -0.002 -0.004 -0.002 -0.004
(0.008) (0.025) (0.008) (0.011) (0.011) (0.007) (0.008) (0.010)
Democracy -0.011 -0.040* -0.016* -0.012 -0.012 0.000 0.000 -0.001
(0.006) (0.021) (0.008) (0.007) (0.007) (0.003) (0.002) (0.004)
Debt Service 0.001 0.010 -0.014 -0.004 -0.004 0.001 0.005 0.011
(0.004) (0.024) (0.020) (0.016) (0.016) (0.005) (0.005) (0.013)
Reserves -0.000 -0.000 -0.000 0.000 0.000 0.000 0.000 0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Short Term Debt -0.000 0.000 0.000 0.000 0.000 0.000 0.000 -0.000
(0.000) (0.001) (0.001) (0.001) (0.001) (0.000) (0.000) (0.000)
N 835 654 654 619 615 615 654 654 360
Country FE YES YES YES YES YES YES YES YES YES Year FE YES YES YES YES YES YES YES YES YES No. of Countries 59 45 45 44 44 44 45 45 37
No. of Instruments 35 34 34 29 34 34
AR(2) (Pr > z) 0.191 0.121 0.599
Diff in Hansen 0.816 0.409 0.054 (GMM) Diff in Hansen 0.477 0.624 0.131 (IV) Notes: * p<0.05, ** p<0.01, *** p<0.001; Robust Standard Errors in Parentheses Dependent Variable, Fin Req, and Political Cycle Led One Year (see discussion).
48
Figure 1: Adjusted Predictions of MIC Partisan External Borrowing .9
.8
.7
.6
.5
.4
% of External Finance From Official Creditors Finance % of External .4 .6 .8 1 1.2 1.4 1.6 Financing Requirement (Revenue/Expenditure)
GMM Model (Table 2, Model 8) Non-Right Govt Panel Cluster-Robust SEs Right Govt 95% Confidence Intervals
Figure 2: Adjusted Predictions, Center Governments Dropped .9
.8
.7
.6
.5
.4
% of External Finance From Official Creditors Finance % of External .4 .6 .8 1 1.2 1.4 1.6 Financing Requirement (Revenue/Expenditure)
GMM Model, No Center (Table 2, Model 9) Left Govt Panel Cluster-Robust SEs Right Govt 95% Confidence Intervals
49 Conclusion
The results show government partisanship has a substantive effect on which financial options MICs use when borrowing externally. Right governments are more likely to use official credit and left governments are more likely to use private finance, unless the MIC faces such a high financing requirement that all sources must be used despite government preferences. The systematic variation in borrowing policies helps explain why MIC debt portfolios come to vary over time.
This has implications for understanding how external borrowing choices affect debt sustainability and policy autonomy in MICs. It also signals the importance of national revenue capacity if developing countries are to maintain national autonomy in the global financial system. Lastly, the study adds to a growing literature that shows partisanship shapes developing countries’ strategies for participating in the global economy.
First, debt sustainability is often discussed in terms of total outstanding debt.73 While total debt is certainly central to debt sustainability, this study has shown that not all external debt is the same, especially for MICs. Because not all debt is the same, what matters is not only how much debt a government owes but the terms and conditions of that debt. In this sense, the politics of external borrowing preferences can matter a great deal over the long term in shaping the types of benefits and costs that external debt yields over time.
Specifically, governments that prioritize markets may be more responsive to domestic political economic demands, but take on higher interests rates and expose themselves to debt risk by doing so. Governments that prioritize official creditors may have lower debt repayments and thus more sustainable debt levels, but risk being less responsive to domestic policy demands as
73 Reinhart and Rogoff 2009.
50 they accept loan conditions. The challenge for MICs is thus not only to keep debt levels sustainable, but to effectively manage the benefits and costs of different external financial sources over time.
For this reason, optimal MIC foreign borrowing policy would reflect diversified use of official and private options, at least until sustained growth brought the country into high-income status and thus a new position in the global economy. Openness to “all potential creditors and markets” enhances MIC flexibility, ensuring MICs identify “the creditor that can offer the most beneficial or cost-effective terms and conditions” and negotiates accordingly.74 Using both official and private finance can maximize resources while increasing the likelihood that debt terms and conditions are manageable in the medium and long term.
But as this study shows, borrowing is not simply a matter of technocratic management.
Partisanship shapes borrowing and can cause MICs to eschew one option or the other. The effects of this can be seen in the two examples from the opening. Botswana faces diamond dependence and high inequality.75 Private finance could help diversify the economy, increase public spending, and benchmark for the private sector. But the right-leaning government resists these resources (see Chapter 4). Meanwhile, South Africa’s strict use of private finance despite high interest rates and short maturities means the government’s borrowing choices over time have led to significant high debt repayment obligations, minimizing national fiscal space for social and economic investment domestically.76 Better rates and maturities from official creditors could make South African debt sustainable and allow more fiscal flexibility. But the left-leaning government explicitly avoids them (see Chapter 4). Over time, these MICs’ debt positions,
74 World Bank 2015b, 40–41. 75 Lewin 2011a. 76 International Monetary Fund 2018c, 5.
51 policies, and thus economic strengths and risks, have been affected by partisan borrowing preferences.
Second and relatedly, this study clarifies how fiscal policy affects borrowing autonomy.
Effective debt management, insofar as it involves using politicians’ preferred creditors and minimizing debt risk within those parameters, depends on having manageable deficits. The results above suggest that if a MIC needs to finance more than 20% of its budget, it is unlikely the MIC can use only preferred creditors that fit government priorities. Domestic revenue capacity is crucial for maintaining autonomy in the global financial system.
Third and applicable to comparative development studies as well as the international political economy of financial flows to developing countries, this study adds to a group of studies that show partisanship shapes foreign economic policy in developing countries.77 Partisanship is a promising path for better understanding variation in developing countries’ strategies when participating in the global financial system and the global economy more generally.
The next three chapters trace the partisanship effect on external borrowing in four MICs
(South Africa, Botswana, Peru and Thailand). In doing so, the importance of these concluding remarks are discussed throughout
77 Pinto 2013; Pinto, Weymouth, and Gourevitch 2010.
52 Chapter 4: South Africa and Botswana
Introduction
South Africa and Botswana provide a study in contrasting external borrowing
strategies. From 1990-2015, South Africa emphasized private finance while Botswana
almost strictly used official creditors. I argue the partisanship of each country’s dominant
party explains this variation. South Africa’s left-leaning African National Congress
(ANC) pressures the state to avoid conditionality and use private financing.1 Meanwhile,
Botswana’s right-leaning Botswana Democratic Party (BDP) encourages use of official
creditors. This chapter details these partisan differences and their effect on borrowing.
Varied borrowing strategies may be expected because the two MICs have little in
common. But many of the ways in which the two contrast may lead one to expect other
outcomes. Higher growth rates, lower debt levels, and superior credit ratings give reason
to expect that Botswana would use more private credit than South Africa. But this is not
the case. Meanwhile, comparison over the same period makes clear that global conditions
do not lead to similar borrowing strategies across MICs (see Charts 4, 5, and 6).
This leaves domestic politics, specifically government partisanship, central to any
complete explanation of the two countries’ external borrowing choices. ANC and BDP
constituencies and borrowing priorities are detailed below. Each country’s laws and
borrowing processes are outlined, illustrating how minimal legal and institutional
frameworks create space for government partisanship to be the major determinant of each
country’s external borrowing policy.
1 The issue here is not whether official creditors’ reputation for imposing economic orthodoxy is deserved. The reputation persists and borrowers behave according to their views of that orthodoxy. This is evident through the interviews below and in other chapters.
53 One-party dominance in South Africa and Botswana provides straightforward cases for tracing partisanship’s effect on MIC external borrowing strategies. The next chapters analyze Peru and Thailand, where changes in government partisanship over time provide more complex cases for testing the partisanship argument.
Chart 1: South Africa and Botswana New External Debt Commitments (% Official of Total New Debt) 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
South Africa Botswana
Source: World Development Indicators and author’s calculations
South Africa
The electoral and political dominance of the left-leaning ANC since 1994 has led the South African state to avoid official creditors when borrowing abroad. ANC fiscal and labor policy preferences clash with the terms of official loan conditions, incentivizing use of private finance.
This section first describes the institutions and parties that shape the contours of
South African politics. It then identifies the elements of ANC partisanship that have
54 shaped borrowing. It then illustrates how the laws and institutions that underpin South
Africa’s annual borrowing decisions create space for government partisanship to affect borrowing. While independent State-Owned Enterprises began using official creditors in
2009 and guarantees have brought some official credit onto the Treasury balance sheet, the central government has always used private sources for its financing needs due to
ANC influence.
South African Politics
From 1948-1994, the National party dominated South African politics and government by institutionalizing the racially-segregated system of Apartheid. The
Apartheid government was closely associated with mining and manufacturing capitalists, with each reifying the other’s power by creating and sustaining an oppressive migrant labor system where non-white labor was largely powerless against both government and industry. Race and class were thus bound together to an exceptional degree in South
Africa, with white capital and non-white labor clearly defining the core partisan cleavage in the country.2 The National party represented the powerful white government and business elites, while the African National Congress (ANC) came to be the pre-eminent representative of non-white labor and socialist groups fighting Apartheid repression.3
The end of Apartheid came with South Africa’s first open elections in 1994.
While “many areas were… dominated by one party” in that election, the ANC won a significant general victory with 63% of the vote compared to the National party’s 20%.4
The next elections in 1999 saw the ANC increase its share to 66% of the vote. The
2 Thompson 2001a, chaps 6–8. 3 The Inkhatha Freedom Party, based in KwaZulu province, was an important third party whose leadership eventually aligned itself with Nelson Mandela and the ANC. 4 Thompson 2001a, 263–264.
55 Democratic party absorbed and replaced the National party as the major opposition, but won less than 10% of the vote.5 Such ANC dominance persisted through the mid 2010s, making South Africa a one-party democracy throughout the period of this study.
ANC Partisanship & External Borrowing Preferences
Apartheid’s end in 1994 marks a watershed moment for any analysis of South
African political economy. This is true of external borrowing as much as any other policy area. From 1985-1994, South Africa faced an embargo on both official and private sources of external finance. The embargo ended with Apartheid, and the ANC immediately had access to both official and private external resources after it won the first post-Apartheid elections in early 1994.6
The ANC is a left-leaning party that, at least in part, sees the state as a tool for transferring power and resources to the previously oppressed South African majority. To be sure, domestic business and international capital constrain implementation of the
ANC’s original economic agenda. These influences led some post-Apartheid trade and monetary parts of ANC economic policy to follow neoliberal orthodoxy.7 But such interests did not keep the ANC from pursuing left-leaning policy aims in other important areas. Two of these areas, labor policy and fiscal policy, have shaped South Africa’s external borrowing.8
With respect to labor policy, it is important to recall labor’s central place in the
ANC constituency. The ANC is one of three legs of the “tripartite alliance,” the other two
5 Ibid., 270; 288. 6 Chart 4 shows all three major ratings agencies rated South Africa by the end of 1994. Interviews 57 and 61, people involved with national debt strategy in the 1990s, recalled the eagerness of foreign investors to invest immediately after Apartheid ended. On the return of bilateral sources of credit, see Thompson 2001, 280. Multilaterals became available but were not used to any substantive degree, as discussed below. 7 Handley 2008, chap. 3; Thompson 2001b, chaps 8–9. 8 Handley 2008, 79–83.
56 being the South African Communist Party (SACP) and the Congress of South African
Trade Unions (COSATU). ANC electoral success depends in particular on the union portion of this alliance. In fact, burgeoning union frustration with the ANC in the later
2010s may be the biggest threat to the party’s grip on power since 1994.9 Despite recent fractures, however, the tripartite alliance is why the ANC has long supported strong unions and wage protections (especially for the country’s large public sector).10
Crucial for this study is that South African unions explicitly want government to avoid official creditors because they are perceived to threaten these pro-labor policies.
This has been true throughout the post-Apartheid period. In 1996 the COSATU president called on government to avoid the IMF and World Bank because their loans “have had a devastating impact on the lives of working people.”11
That position continued into the 2010s. COSATU’s official policy in 2012 was to
“shift away from the failed solutions offered by the current hegemonic financial institutions, such as the IMF and the World Bank and the African Development Bank.”12
In 2017 a COSATU spokesperson said during an interview that “our position has always been to stay away from the World Bank and the IMF… because they will make [the government] privatize, reduce wages, [and spend less].”13
Labor and thus ANC resistance to official creditors due to conditionality is not a secret. All government and lender interviewees agreed that official creditors “are a no- go” because ANC leaders would resist foreign involvement in labor or any other policy
9 Calland 2013, chap. 8. 10 Handley 2008, 81–83; Thompson 2001b, chap. 9; Bassett and Clarke 2008. 11 Gomomo 1996. 12 COSATU 2012, 38. 13 Interview 52.
57 area.14 Fear of conditions and concern about loss of control make use of official creditors
“more trouble than it is worth” for the Treasury.15 Even if a particular ANC minister is open to official creditors or if bureaucrats think official credit “may be a good way to expand resources,” they are “constrained by two of the three legs” of the tripartite alliance.16 Whether this view of official conditions is warranted or not is less important than the effect of official creditor reputations.
With respect to fiscal policy, from 1994 the ANC engaged in a variety of large state-led developmental programs to address the socio-economic inequalities inherited from the Apartheid era. While Nelson Mandela’s and Thabo Mbeki’s market-pleasing management of spending frustrated some ANC wings, the ANC has still been a consistent spender. Chart 2 shows South Africa ran primary deficits in all but two years since 1994.
Chart 2 also shows deficit levels increased substantially after Jacob Zuma took office in 2009. The Zuma years brought new levels of deficit spending to facilitate a “big- tent” approach meant to patronize a variety of constituencies related to the tripartite alliance that continue to form the core of ANC support.17 Many note multiple public employee wage hike bills overseen by Zuma put particular strain on the budget.18
Such constituents are why all interviewees noted reversing this spending trend would be politically difficult. Although a commodity boom increased revenues from the mid-2000s to the early-2010s, South Africa still usually ran deficits due to persistently increasing spending. When revenues fell, ANC fiscal policy did not change accordingly
14 Quote from Interview 48. 15 Quote from Interview 41. Interviews 41, 42, 43, 45, 46, 47, 48, 49, 51, 52, 58, 59 all noted one or a combination of these conditionality, control, and trust factors. 16 Quotes from Interviews 51 and 45, respectively. 17 Calland 2013. New levels of corruption also reflect an increasingly patrimonial state under Zuma. 18 Interviews 43, 45, 47, 51.
58 but instead “sustained public spending increases.”19 In short, the ANC’s fiscal priorities consistently lead to large deficits, a policy preference which official loan conditions are presumed to threaten.
Chart 2: South Africa Central Government Primary Budget Position (%) 4 3 2 1 0 -1 -2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -3 -4 -5 -6 -7
Source: International Monetary Fund and author’s calculations
The Budget—Setting the Financing Requirement
Constituents’ policy preferences underpin ANC left-leaning partisanship. They shape borrowing because official creditors either would or are perceived to threaten pro- labor policies and loose fiscal policies. Moreover, the South African budget process ensures these political factors are the primary determinants of fiscal and borrowing policy. This is because legal constraints on the budget process, which might constrain spending or debt, are minimal in South Africa. In other words, ANC policy preferences
19 Republic of South Africa National Treasury 2009a, 14.
59 are not substantively constrained in shaping spending, revenue, the financing requirement the Treasury must fund each year, or the creditors they use to fund it.
To begin, South Africa does not have a legal limit for total or annual debt.20 An ostensible constraint is an expenditure ceiling introduced by Treasury itself in 2012.21
While some bureaucrats hope the “spending limit acts as a debt limit,”22 the ceiling is not binding. It is a “flexible” and “soft” reference point Treasury cannot use as more than a point of persuasion.23 In fact the ceiling has increased each year since 2012, indicating it is more of a response to ANC fiscal policy than a constraint on it. 24 While “the goal is always to stay within the ceiling,” keeping spending within that level depends on the willingness of ANC leadership.25 Indeed, some express concern that debt problems are becoming intractable because Treasury has been complacent in not fighting for more voice or formal legislation.26 Chart 6 shows debt levels increased rapidly in South Africa over this period.
Nor does South Africa have a formal law governing debt composition. A self- imposed guideline at Treasury is that no more than 20% of all new annual debt can be foreign.27 This number signals how important the domestic market is for the South
African government. During Apartheid, as the nation faced an embargo on external finance, the state helped deepen domestic capital markets as a financial resource. This is
20 The Public Finance Management Act states that only the National Treasury and SOEs can borrow, but it does not provide any formal legal constraints on debt or borrowing. 21 Republic of South Africa National Treasury 2014a, 33. 22 Interview 47. 23 Calitz, Siebrits, and Stuart 2016, 339. 24 See Chapters 3 and 4 of Budget Reviews since 2012 to compare ceilings. For an example of the persistence of this fluidity past 2015, see Republic of South Africa National Treasury 2017a, iv. 25 Interviews 43, 45, 47, 48, 49, 51. Quote from Interview 46. 26 Interview 48. 27 Interview 43. Interview 46 agrees but says Treasury actually aims for 10%, signaling the fluidity and informality of these guidelines.
60 discussed more below, but is useful to note here because the relative depth and quality of domestic finance (for a MIC) created resources, knowledge, and comfort with markets that has limited any sense that South Africa needs laws that formally regulate debt or borrowing.28
Given these minimal legal constraints, ANC policy preferences are thus the main determinant of revenue, expenditure, and financing requirements. Ministers and MPs mostly part of the ANC compete for resources in drafting and authorization phases of the budget process, making the South African budget a political process where it is hard to ever decrease spending.29 While the size of the pie increased most during the Zuma years, the ANC has generally overseen high spending levels and normally hands Treasury large annual financing requirements (see Chart 2).30
Other than setting a soft expenditure ceiling, Treasury’s impact on the budget process is limited. All interviewees agree the primary job of Treasury is simply to fund the budget, no matter what the funding requirement ultimately is. Treasury can consult on debt risk during budget talks, but they are ultimately passive recipients of financing requirements. The limited role of Treasury in the budget process reifies the space that
ANC distributional politics have in shaping annual financing requirements.
The ALM—Deciding How to Finance the Budget
Once the budget for the coming year is passed, Treasury’s Asset and Liabilities
Management (ALM) division has until November to devise a funding strategy.31 The
28 Interviews 41, 42, 43, 46, 47, 48, 49, 57, 58, 61. 29 Interview 46. See also Republic of South Africa Parliament 2011, 19–27. 30 Interviews 43, 51. 31 Interview 43.
61 ALM’s official mandate is to manage debt “only by cost factors.” 32 But if cost was the only consideration, South Africa would use more official credit. As argued throughout,
ANC partisanship prevents this.
The ALM uses an informal hierarchy of sources to finance the budget.33 Domestic bond markets are the preferred source. Short-term domestic treasury bills are the second option and external financing options are the third. A small retail bond market makes up one percent of South African debt and rounds out the government’s debt portfolio. In sum, after maximizing use of domestic options, the ALM “will get down to an amount we need to get offshore.”34
When considering external financing, the ALM prefers to issue bonds.35 There are four reasons for this preference, all of which make clear how ALM borrowing decisions are primarily shaped by political expediency. In other words, despite any claims of ALM autonomy when choosing creditors, their choices are constrained by key components of
ANC partisan politics. The four reasons ALM prefers bonds and avoids official creditor options are: avoiding conditionality, not being involved with fund use, managing cash given revenue problems, and relying on technical capabilities that have developed in the
ALM over time.
First, as detailed above, the ANC explicitly resists making use of official sources of credit. For the ALM this means that borrowing from multilateral or bilateral creditors for the “price benefit… is more trouble than it is worth” due to the political transaction
32 Interview 58, who noted borrowing decisions were made by the central bank until the mid 1990s and the ALM was established to separate borrowing policy from monetary policy. 33 Interviews 43, 47, 48, 49. 34 Interview 46. 35 Interview 47 noted that drawing on foreign reserves is a funding option the ALM has sometimes used before seeking external financing, though the levels at which this is appropriate are a matter of debate.
62 costs that would come with trying to ratify foreign loan conditions.36 All current and former officials interviewed on both lender and government sides emphasize this ANC effect.
On the lender side, World Bank staff note the reputation of conditionality in South
Africa remains associated with Structural Adjustment conditions from the 1980s and
1990s. Many suggest this is an outdated view of conditionality, but it nevertheless keeps the government from borrowing despite the Bank’s eagerness to lend.37 Similarly, such anticipated conditions and constraints are why the African Development Bank has never had serious discussion with the ALM about loans.38 ALM officials say Western bilaterals are not considered beyond grants, while Chinese loans are not only as expensive as markets but include more problematic conditions than Western lenders.39
While it is cheaper for South Africa to borrow domestically than from official creditors,40 official lender reputations keep the ALM in more expensive foreign bonds.
This is true despite substantial increases in private interest rates throughout this period.
Most large foreign bond issuances (over USD $1 billion) from 2007-2015 were issued while South Africa’s credit ratings were below investment grade, at rates between 5-
6.875%.41 Meanwhile, World Bank loans were available at no higher than the 3.8%
Eskom received in this period.42 Despite these high interest rates, the ALM strategically and systematically avoids official creditors for reasons of political expediency.
36 Interview 41. 37 Interviews 42 and 65. 38 Interview 68. 39 Interviews 41, 43, 45, 46, 47, 48, 49, 51, 52, 57, 58, 59. 40 Interview 47. For example, the World Bank swap mechanism means Bank loans are normally “still not cheap enough” compared to borrowing domestically. 41 General bond data from Interview 50. 42 See finances.worldbank.org for World Bank country-specific prices. See discussion in Chapters 2 and 3 for official lender rate-setting practices. It is important to keep in mind the additional cost of currency
63 Second, how borrowed funds are used is not under the ALM’s purview.
Distribution of borrowed resources is left to ministers and MPs to decide. This means some key benefits of official creditors, namely project specific lending, technical support, and project monitoring are not immediately relevant to the ALM. As one official notes,
“it doesn’t make sense for us to focus on specific projects…everything [we borrow] goes into the [National Revenue Fund] and gets taken from the pot… It becomes difficult to have discussions about [funding for] specific projects. We look at [borrowing] from a much bigger picture than that.”43
In other words, using official credit would require becoming involved with politically sensitive details of fund allocation and condition implementation. While official and private investors encourage this as a way to improve governance and minimize corruption, the ALM finds it difficult to take on this political “slippery slope.”44
Third, cash management pressures given existing debt obligations incentivize use of private external finance. This is even more relevant when revenues fall short of anticipated targets. One official notes “we have consistently made more use of capital markets over [official] loans. Given how much we need to fund, we find great value in
[using] capital markets as opposed to [official creditors], simply because of the amount we need to fund.”45
This is an implicit but pointed admission of how ALM prioritizes political expediency over prices. It is politically facile to simply rollover large levels of debt by
swaps, because the Bank cannot lend large amounts in Rand, increase this price. But it remains lower than external bond rates. 43 Interview 46. 44 Interviews 43, 47, 48, 49, quote from Interview 51. 45 Interview 46.
64 staying in bond markets, rather than negotiating with a number of official creditors that would offer lower interest rates but also be interested in addressing politically-sensitive revenue and governance problems. Indeed, the ALM issues a minimum of $1 billion
USD in foreign bonds every other year to rollover existing debt and maintain benchmarks.46 For the ALM, revenue shortfalls due to lower-than-expected growth, tax collection problems, falling export prices, and corruption are reasons for using private finance.47
Fourth, ALM officials are comfortable with bond markets and confident in their risk management practices. This stems from the development of domestic bond markets during Apartheid and relatively easy access to foreign markets immediately afterwards.48
Since then ALM officials have felt South Africa can manage price fluctuations and other market exigencies, even when over-borrowing.49 Indeed, despite “increased risk” due to fiscal positions, financial market volatility, inflation, exchange rates, and credit ratings, the ALM feels it has “resilient fiscal and debt management policies” so continue to borrow billions annually in foreign markets.50
Foreign investors are also confident in the ALM, feeling it “has done well to avoid” official creditors and stay in markets.51 Even as South Africa moved into junk bond credit ratings, foreign issuances remained 2-4 times oversubscribed in American
46 Interviews 43, 44, 45, 47, 48, 49. 47 Interviews 43, 44, 45, 47, 48, 49. 48 See footnote 2. 49 Interview 41. 50 Republic of South Africa National Treasury 2017b, 82–83; 93. 51 Interview 50.
65 and European markets.52 ALM confidence is mirrored by investors who think “no
[investor] is not going to get their money back” from South Africa.53
A symbol of persistent confidence on both sides is that South African roadshows are non-deal roadshows. While most MICs must issue while on the road in front of investors, the ALM has been able to issue bonds whether on the road or not. This has been true since 2012 and persisted through credit rating downgrades.54
A pointed case is when President Zuma recalled Finance Minister Pravin Gordhan from a March 2017 London roadshow. The ALM still met with 26 investors that day and issued months later, avoiding official creditors despite this public display of political uncertainty.55 Although the example is from after this study’s timeframe, it highlights the persistence of foreign investor interest in South Africa despite overt political-economic problems, the ALM’s use of that market despite expensive rates, and resistance to official options.
Taken together, these four factors lead the ALM to use markets when turning abroad for finance. ANC partisanship, particularly through fiscal and labor policy, prevent the ALM from even considering official credit that comes with conditions.
Coupled with confidence in technical aspects of debt management and market involvement, the ALM continues to use private market finance despite worrying macroeconomic trends and high private interest rates.
State-Owned Enterprises
52 Republic of South Africa National Treasury 2013, 16–17; Republic of South Africa National Treasury 2014b, 21–23. 53 Interview 51. 54 Interviews 47, 48, 49. 55 Interviews 42, 43, 44, 45, 46, 47, 48, 49, 50, 51. The effect of the recall on interest rates was less substantial than in the domestic market (Interview 43).
66 It is important to note the ALM (i.e. the central government) is not the only public debtor with foreign obligations in South Africa. State-Owned Enterprises (SOEs) also borrow abroad, controversially affecting the government balance sheet. SOEs must be covered to paint a complete picture of South African public borrowing since 1994.
While South African line ministries cannot borrow outside of ALM processes, large SOEs can. They have their own treasuries that can simply “borrow with the approval of their Board of Directors.”56 The ALM relationship to SOEs is consultative rather than authoritative.57 Serious debt problems have arisen from this arrangement, which is why Treasury has long tried to increase influence over SOE borrowing to
“enhance [government’s] creditworthiness.”58
Despite independent decision-making, SOE borrowing affects Treasury through explicit or implicit guarantees.59 Explicit guarantees include formal government backing for the obligation, requiring repayment by Treasury in the case of SOE default. SOEs apply for explicit guarantees and Treasury has the authority to reject applications.60 If granted, explicit guarantees come with conditions and go on the national balance sheet.61
If rejected, SOEs can and often do borrow anyway. This leads to controversial implicit guarantees, since the government would find it difficult not to bail out SOEs in the event of non-guaranteed default.62 All SOE guarantees “remain a major risk to the fiscus.”63
56 Republic of South Africa National Treasury 2015, 39. 57 Interviews 41, 43, 46, 47, 48, 49, 53, 62. 58 Republic of South Africa National Treasury 2013, 2. 59 See Republic of South Africa National Treasury 2015, chap. 5. 60 Interviews 41, 43, 47, 48. 61 Interviews 43, 62. 62 Interviews 50, 62. 63 Republic of South Africa National Treasury 2017b, 91.
67 While many SOEs have the potential to affect national debt and risk positions, the most important is utility company Eskom.64 Eskom’s creditworthiness used to be so high that Treasury borrowed through Eskom,65 but price and production problems over time have inverted this relationship. By the mid 2000s and 2010s, Eskom had junk credit ratings, faced higher external interest rates than the central government (7.37% in 2014), and repeatedly exceeded its planned borrowings agreed with Treasury and issued nonguaranteed bonds.66
In response, Eskom began to “look all over the place” for finance in this period and found the cheapest option was official creditors.67 Indeed, in 2009 Eskom borrowed
US$2.5 billion from the African Development Bank (AfDB) and in 2010 borrowed
US$3.75 billion from the World Bank.68 The ALM had little to do with these loans other than providing explicit guarantees. As one Treasury official said, “[Eskom has] their own strategy, and if going to [official creditors] is what they feel they need to do, that is what they will do.”69 Eskom continued to use official creditors from 2010, returning to the
AfDB multiple times and borrowing from Japan, Europe, the United States, and China.70
64 In 2014 it accounted for over 72% of all SOE guarantees. See Republic of South Africa National Treasury 2014b, 40. 65 Interview 53. 66 Republic of South Africa National Treasury 2014b, 39, 42; Republic of South Africa National Treasury 2015, 41. Interviews 42, 45, 50, 53, 54, 62. . 67 Quote from Interview 53. Price detail from Interviews 50 and 62, who also noted that domestic options for Eskom were scarce given domestic awareness of Eskom problems. 68 Interview 62. Negotiations largely concluded in 2009 but most the Bank’s board committed most of the funds in early 2010. Including loans from Bank environmental funds, the World Bank loan reached US$4 billion in total. See Republic of South Africa National Treasury 2010, 97; Republic of South Africa National Treasury 2009a; Republic of South Africa National Treasury 2009b. 69 Interview 46. 70 Interview 62, who also noted this shift away from the World Bank to other official creditors since 2009/10 was not only because of the size of the 2009/10 loan, but because these other lenders would fund coal projects. On the China loan, see Eskom 2017.
68 While these lenders help attract hesitant private capital to Eskom, official credit came to comprise 90% of Eskom’s financing during this time.71
Although Eskom borrowing is not under the same direct political pressure as central government borrowing, unions worked to minimize the possible negative effects that official loan conditions to SOEs could have on their interests. During Eskom’s negotiations with the World Bank, COSATU and other unions expressed concern about the Bank’s “neoliberal agenda and demand [for] privatization,” leading COSATU to demand “that there are no conditions which could lead to any form of privatization… should there prove to be any such strings, COSATU will oppose the loan.”72 Such pressure helped ensure that privatization was not a condition in any of the large official loans to Eskom from 2009-2015. While Eskom’s unique level of financial desperation led labor to accept official creditor involvement in these years, unions were able to ensure privatization or other conditions that would immediately hurt labor interests did not take place in those years either.73
Ultimately, because of guarantees, Eskom’s use of official creditors brings official debt onto the government’s balance sheet. Other SOEs have had this effect as well, and any South African official credit seen in Chart 1 is from SOE guarantees.74 In particular,
Eskom is why Chart 1 shows a spike in South Africa’s official commitments in 2009 and
2010.
71 Groenwald and le Cordur 2017; Interview 68. 72 COSATU 2010. 73 Indeed, the debate remained topical through the rest of the decade. See Vecchiato and Cohen 2019. 74 Japan and Europe are among official lenders to other South African SoEs over the years. See Republic of South Africa National Treasury 2010, 97.
69 This SOE effect on creditor usage is important to emphasize given the argument about partisanship posited in this study. The ALM carries official debt only due to SOE guarantees, not because it has ever used official creditors to fund central government’s borrowing requirements. Indeed, the ALM continued to strictly use capital markets even in 2009 and 2010, when higher prices during the global financial crisis may have given reason to diversify.75
South Africa Borrowing
Despite official creditor price benefits vis-à-vis global bond markets, the ALM uses bonds because ANC constituents explicitly prefer avoiding official credit conditions.
Left-leaning fiscal and labor policies are central to this preference. Fiscal and debt laws do not constrain spending or borrowing, making partisanship the major determinant of fiscal and borrowing policy.
Without ANC partisanship, it is hard to explain South African external borrowing since 1994. If borrowing decisions were only about the size of the financing requirement, official credit would have comprised external borrowing when the financing requirement was relatively small, such as in the 2000s under Thabo Mbeki and during the commodity boom years (see Chart 2). But the ALM continued to issue bonds even in these years.
If borrowing were determined by global liquidity, the ALM would have used official credit from 2008-2010 since “access to foreign finance [became] much scarcer and more expensive.”76 But SOEs were the only ones to use official credit in these years.
The ALM did not. And if growth, debt levels, credit ratings, or other fundamentals
75 Republic of South Africa National Treasury 2009a, 14; Republic of South Africa National Treasury 2010, 91. 76 Republic of South Africa National Treasury 2009a, 14.
70 shaped borrowing, prices should have become prohibitive over the course of 1994-2015.
See the constant decrease in credit ratings in Chart 4 and increase in debt levels in Chart
6. Instead, South Africa continues to issue because “at the right price, there will always be a market” and it is politically easier to find that market price than use official credit.77
Notwithstanding SOEs, the post-Apartheid government has used private bond markets when it turned outside for finance, despite cheaper alternatives and in years when these may have been particularly appealing. Understanding this borrowing policy requires seeing borrowing decisions as products of government partisanship, which since
1994 has reflected policy preferences of the relatively left-leaning ANC. The chapter now turns to Botswana, another one-party democracy but one dominated by a right-leaning party that favored a different external borrowing strategy over this period.
Botswana
Some call Botswana an “African Miracle” for persistent growth based on
“democratic institutions, a prospering private sector, and healthy public finances.”78
Despite high inequality, devastating effects from the HIV/AIDS epidemic, and diamond dependence,79 the country was creditworthy enough to access private external finance as well as official finance from 1990-2015.80 In fact, compared to South Africa, Botswana had superior credit ratings, fiscal positions, and debt levels throughout this period.81
77 Interview 47. 78 Samatar 1999; Danevad 1995, 381. 79 Hillbom 2008; Makgala and Botlhomilwe 2017a; Lewin 2011b, 87–88; Taylor 2004. 80 Interview 82 noted the Botswana Ministry of Finance and Economic Development resisted offers for ratings and central bank pressure to get ratings until 2000. The offers, central bank pressure, and the high investment-grade ratings they immediately received when Moody’s and S&P rated the country, indicate creditworthiness (see Chart 4). 81 See Charts 2-6.
71 Yet Botswana almost entirely used official creditors when turning abroad for finance. Why would Botswana avoid markets despite better economic fundamentals than
South Africa? I argue Botswana’s use of official credit is explained by the right-leaning partisanship of the country’s dominant party, the Botswana Democratic Party (BDP). The
BDP’s elite constituency leads to economic conservatism and openness to official creditor conditions that reinforce “good” policy.82
Botswana Politics
The BDP has controlled Batswana politics since independence in 1966. While its majority in parliament has decreased from 80-90% of parliamentary seats in the 1960s and 1970s to 70-80% in the 2000s, non-BDP votes are spread across a number of small parties rather than one particularly strong opposition party. These outcomes reflect a persistently dominant BDP in national politics, making Botswana a one-party democracy in the period under study here.83
The BDP’s roots lie in ethnically homogenous rural areas dominated by the cattle industry. From independence, patrimonial transfers shored up the support of cattle industry elites.84 The discovery of diamond deposits led to massive government revenues by the mid 1970s and in the 1980s the BDP tried using these funds to diversify the economy. These efforts took the form of large transfers to new manufacturing and service sector entrepreneurs, which on top of economic diversification also aimed to obtain “the political loyalty of an increasingly diversified economic elite.” Over time then, BDP support solidified across owners of capital in sectors and locations as diverse as rural
82 Lewin 2011b. 83 Poteete 2012, especially Figure 3. 84 Danevad 1995, 389.
72 cattle farming, urban secondary and tertiary sectors, and multinational diamond mining companies.85
It is difficult to overstate the political effect of Botswana’s unparalleled diamond revenues. While efforts to diversify the economy have failed,86 diamond-funded transfers allow the BDP to patronize and ensure political support from elites in both successful and fledgling sectors.87 Prioritizing elites has led to substantial inequalities and “suggest the majority of the population… only constitute a limited source of political pressure” on the
BDP.88 Even those who laud Batswana economic development concede that the BDP’s national development strategies are designed “in the interests of the dominant class.”89
This means labor has long been in-conflict with the BDP, a trend started by BDP founder and Botswana’s first President Seretse Khama.90 Parties such as the Botswana
National Front, the Botswana People’s Party, and the Botswana Congress Party traditionally represent “left-oriented economic policies,”91 but excessive fragmentation and their leaders’ habit of moving to the BDP when seeking higher office leave these parties largely impotent vis-à-vis the BDP.92 The minimal influence of labor and left- leaning parties in Botswana under the BDP is detailed further in the following discussion of BDP policy preferences.
BDP Partisanship
85 Ibid., 389–393. 86 Good 2005; Hillbom 2008; Lewin 2011b, 87; Makgala and Botlhomilwe 2017a, 55–58. 87 Good 2005; Von Soest 2009. 88 Danevad 1995, 395. 89 Leith 2005, 40, referencing and aligning himself with Samatar 1999. 90 Khama 1971. 91 Makgala and Botlhomilwe 2017b, 70. 92 Good 2003; Cook and Sarkin 2010; Poteete 2012; Makgala and Botlhomilwe 2017a.
73 Elite constituents incentivize the BDP to consistently implement right-leaning, liberal economic policy. The most important for this study are fiscal and labor policies.
They are taken in turn here.
First, fiscal conservatism is a main reason the BDP is criticized for overseeing
“growth without structural change and development.”93 Chart 3 shows the BDP ran large surpluses from 1990-2015. Supporters argue BDP prioritization of saving over spending is “prudent fiscal policy” providing “macroeconomic stability.”94 In practice, savings allow for accumulation of reserves the state uses to smooth effects of diamond market downturns. The BDP has saved so much that reserve levels reached 25 months of import cover in the 1990s and, while trending to half that level by the 2010s, BDP-led economic ministries see nine months of import cover as the lowest acceptable reserve level.95 These high thresholds give Botswana a financial cushion that is “exceptional in the developing world.”96
Such large surpluses and reserve levels are not inevitable. They reflect the BDP’s conservative aims of “withholding some of the benefits from the economy during the booms… to insulate it from the busts.”97 In the event that negative revenue trends make surpluses difficult to maintain, the Ministry of Finance and Economic Development’s
(MFED) plan under the BDP is to either “cut Government expenditure by postponing projects or downsizing the public service, or to enhance the revenue base by eliminating
93 Hillbom 2008, 193. 94 Lewin 2011b, 85–86. 95 Interviews 72, 80, 81, 82. These economic ministries include the finance ministry and central bank. Reserve data, measured by months of import cover, can be found on the World Bank’s WDI database. 96 Danevad 1995, 387. 97 Lewin 2011b, 86.
74 tax expenditures.”98 In other words, despite massive reserve levels, spending is to be cut before reserves are touched. BDP prioritization of fiscal sustainability and minimizing the size of the state is official policy.99
Frustration with this has given rise to the comparatively small and factionalized left-leaning parties noted above.100 They argue over-emphasizing surpluses has kept the government from developmental investment, which in turn has led to worsening inequalities, unnecessary unemployment, and an undereducated population unprepared for a future without diamonds.101 Public frustration is not only due to low spending but also allocation of spending, in particular military expenditure.102 To some extent, then, there is political pressure to increase spending. Yet, as Chart 3 shows, the BDP’s surpluses increase in size in the 2010s despite this pressure.
BDP partisans in the state and private sector know government is “accused of being conservative” because sitting on reserves with “no hard budget constraint” means the government could spend more.103 But they claim spending more would change little because the state does not have the capacity to effectively spend more.104 Regardless, the point is that Botswana has an unusual amount of financial resources for a MIC. The
BDP’s minimal deployment of these resources is a savings-oriented fiscal policy choice that supports an elite rather than popular constituent base.
98 Republic of Botswana Ministry of Finance and Economic Development 2016, vii, paragraph 7. Interview 82 noted this was the first formal debt strategy, but reflects how the same fiscal preferences have been held across multiple generations of civil servants under the BDP. 99 Interviews 72, 79, 80, 81, 82. 100 Taylor 2003; Makgala and Botlhomilwe 2017a. See also Danevad 1995, 399–401, who pointed to similar trends in the early 1990s. 101 Good 2003; Taylor 2003; Hillbom 2008; Cook and Sarkin 2010; Lewin 2011b, 87–88; Makgala and Botlhomilwe 2017a. 102 Beaulier and Subrick 2006, 112. Interviews 72, 73, 74. 103 Quotes from Interviews 81 and 72, respectively. Reserve point from Interview 82. 104 Leith 2005; Lewin 2011b; Botlhale 2015, 415 Also interviews 65, 72, 73, 74, 80, 82.
75 Chart 3: Botswana Central Government Primary Budget Position (%) 30
25
20
15
10
5
0 1990 1991 1992 1993 1994 1995 1996 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: International Monetary Fund and author’s calculations Note: IMF data missing between 1997-2005 and in 2015.
Second, with respect to labor policy and the role of unions in Botswana, the BDP has long sought to minimize labor’s voice in national politics. In a 1971 speech, President
Khama encouraged unions to accept that Botswana could only develop if mining profits were “mainly re-invested and not consumed.”105 Khama was defending fiscal conservatism to the group most likely to challenge it. He also outlined the political implications of not accepting such policy, saying the BDP would “keep the channels of communication open” between government and labor only if labor and their “minority interests” do not seek gains “by direct involvement in the political arena.”106 The effort to minimize labor’s role in politics is clear.
BDP opposition to labor continued through the 1990s and 2000s, manifest in legal restrictions on unions. Unions are hard to register, general strikes are “categorically impossible” (there has never been a legal strike in Botswana due to legal frameworks and
105 Khama 1971, 12. 106 Ibid., 9–10.
76 intimidation), union officials cannot work full-time, and workers are not protected from shop closures.107 The BDP’s contentious relationship with labor continued through the
2010s.108
Together, BDP fiscal and labor policies show the party’s support for capitalist- elite constituents and policies that reflect their interests. This is also true in other policy areas. Free trade has been the norm since the early 1900s and openness to FDI is signaled by the fact that mining company Debswana, now the country’s largest SOE, was initially a fully private South African firm and remains part-owned by foreigners.109 Relatedly, the
BDP overtly favors privatization. Botswana’s public sector is among the smallest in
Africa.110 This stems from the BDP’s early efforts to bring private sector elites into its orbit and the government only operates SOEs that net profits.111
With respect to monetary policy, although the Botswana Pula is pegged to the
South African Rand, the IMF and World Bank support the peg as a tool for managing prices and inflation in a small economy.112 Good governance reinforces Botswana’s reputation for economic liberalism, with transparency and rule of law credited by those who claim Botswana has avoided the resource curse.113
In sum, the BDP’s economic policies reflect its elite constituents and set the stage for Botswana’s use of official creditors. However, laws and institutional arrangements may also affect borrowing. The following section considers these possibilities. It concludes that any fiscal laws or rules are products of BDP preferences in the first place
107 Taylor 2003, 226. 108 Poteete 2012, 87; Makgala and Botlhomilwe 2017a, 69–70. 109 Leith 2005, 68–70, 61-63 (note 7). 110 Lewin 2011b, 86–87. 111 Danevad 1995, 393; Hillbom 2008. 112 International Monetary Fund 2002a, 23; Lewin 2011b, 86. 113 Robinson and Parsons 2006; Beaulier and Subrick 2006; Beaulier 2003; Lewin 2011b.
77 and borrowing preferences reflect BDP prioritization of fiscal sustainability and risk management over other concerns. These are covered in turn below.
Fiscal Rules Written by the BDP Reinforce Conservatism
Botswana’s only debt law is that total outstanding public debt is limited to 40% of
GDP, half of which can be external.114 This is well above real national debt levels and seen as irrelevant.115 Indeed, the BDP government says the law was written only to conform with “international best practice” and “given the modest level of debt in
Botswana, the need for public debt law is not considered necessary.”116
The BDP sets more specific rules in the party’s policy platform, the National
Development Plan (NDP), which is updated in six-to-seven year intervals. For example, spending is limited to 30-40% of GDP with the exact ceiling varying by NDP iteration.117
Reflecting concern about project efficiency and backlog, the NDP always includes a rule that only 30% of debt can go toward new projects rather than recurring expenditures.118
Finally, the NDP sets a debt cap for each line ministry.119 While some want looser fiscal rules to allow for a large-scale investment program (including the IMF), many within the
MFED resist this due to the medium-and-long-term risks of financing such investment, as well as fears about losing oversight of line ministry finances and projects.120
114 Republic of Botswana Ministry of Finance and Economic Development 2016, 23, paragraph 55. For the law, see Part IV of the Stock, Bonds, and Treasury Bills Act, last updated in 2005. 115 Interviews 72, 77, 78, 80. 116 Republic of Botswana Ministry of Finance and Economic Development 2016, 23–24. 117 Interview 80. Also see ibid., v, paragraph 2 for an example of how the BDP has the power to adopt the fiscal rule it sees fit via NDPs. 118 Interviews 77, 78, 80. 119 Interviews 77, 78. 120 Interviews 68, 77, 78, 80, 81, 82. Interview 80 noted the IMF has asked in multiple years of Article IV meetings why the 30% limit on new-investment debt is not higher. See also Republic of Botswana Ministry of Finance and Economic Development 2016.
78 Since Botswana’s fiscal rules are direct products of the BDP’s policy platforms, they are not institutional constraints that force the BDP-dominated Parliament to produce budgets it would not produce otherwise. Moreover, in contrast to South Africa, line ministries have firm control over the few SOEs that exist and none of their budget or financing decisions take place outside of MFED processes.121 The budget process is thus relatively centralized in Botswana, ensuring the BDP can manage all components of the budget according to its preferences.122
Borrowing Process and Choices
After Parliament passes a budget, the DMO considers whether there is a need to borrow.123 Given Botswana’s persistent surpluses, the DMO is normally not interested in general budget support. Instead, the DMO only considers financing for specific projects.
On a case-by-case basis, the DMO determines whether projects in the budget are best paid for by revenue, reserves, or borrowed funds. In practice, borrowing is most likely when a line ministry proposes borrowing for one of its projects or if the DMO receives appealing financing offers as spending plans are made public.124
Borrowing decisions are made by the DMO in coordination with line ministries in an ad hoc manner. Officials say the DMO may accept ministries’ lender choices or force them to use the DMO’s preference.125 Either way, the choices are almost always official creditors, with a few cases since 1990 of line ministries requesting guarantees of bank
121 Interviews 72, 73, 77, 78, 79, 80. 122 Interviews 73 and 74 noted SOE guarantees were in the process of changing in 2017, but this lies outside the scope of the period under study here 123 The DMO’s formal name is the Office of Budget Analysis and Debt Management. 124 Interviews 68, 77, 78, 81. 125 Interviews 77, 78, 81.
79 loans for SOEs.126 Accordingly, any private financing indicated for Botswana in Chart 1 is a guaranteed SOE foreign bank loan.
Once the DMO chooses a financier, Parliamentary approval is required but there is “very little debate” at this stage and MPs “just want to see a presentation.” 127 This signals the degree of policy alignment across the state under the BDP.
Botswana’s hierarchy of borrowing preferences is different from South Africa’s.
Drawing on reserves is preferred, official external credit is the second choice, domestic debt is less common but possible, and private external debt is a last resort. Indeed, the
DMO has never issued an external bond and never borrowed from banks for central government use (i.e. for non-SOE use).128 This chapter’s main question is why Botswana prefers official to private external financiers while South Africa prefers the opposite, but it is useful to note the role of reserves and domestic markets.
Botswana’s high reserve levels make drawdowns a relatively risk-free option. But as noted above, the BDP policy of protecting reserves means other sources of finance are sometimes sought despite abundant reserves.129 Moreover, since the central bank holds reserves and thus sells them to the MFED if it requests, drawing down reserves is not entirely up to the MFED. This small hurdle gives the MFED further reason to not use reserves, especially if reserve levels are trending downwards.130
126 The process is the same regardless of whether an external creditor is private or official (Interview 77). 127 Interviews 77, 78. Interviews 68 and 81 noted a guarantee for a SOE (Botswana Development Corporation) was rejected by Parliament in 2016, a first in their recollection. Interviews 72 and 79 noted this was likely due to increased salience and concern about guarantees in 2016, given Barclays calling in of a government guarantee to mining company BCL and an $800m USD guarantee for Botswana Power Corporation that same year. This signals a possible shift in opinion about guarantees after 2015, the timeframe of this study. 128 Interviews 72, 73, 74, 77, 78, 80, 81, 82. 129 Interviews 72, 82. 130 Interviews 72, 82.
80 Botswana’s domestic capital markets are “immature” and more expensive than external credit, with domestic rates normally around 7-8% and official external rates between 1.5-5%.131 Civil servants and domestic bankers note that government resists issuing long-term domestic debt that would deepen the market.132 Some consider this prudent given the uncertainty that comes from diamond dependence, while others worry using official lenders means the DMO misses the chance to develop domestic markets that can minimize risk in the long run.133
Again, the main question here is why Botswana prefers official rather than private external finance. Crucially, all interviewees emphasize Botswana has market access, saying the DMO “is always told to issue,” that foreign bankers “knock on [the government’s] door all the time,” and that there “is all sorts of demand” for external bonds.134 Botswana’s investment-grade credit ratings corroborate this market access.135
This means Botswana does not issue because of lack of market access. Rather, the
DMO has “no interest at all” in private finance due to “macro policy and government priorities.”136 This has been consistent from 1990-2015. Tellingly, the MFED saw no need to obtain credit ratings in the 1990s, despite pressure from investors as well as the state’s central bank to get them. Once the MFED gave in and received high ratings, both
131 Interviews 72, 73, 74, and quote from 79. Interview 72 noted prices. Interviews 77, 78, 80, and 81 say this means external loans are normally cheaper even including exchange rate risk, while Interview 72 disagreed. 132 Interviews 72, 73, 74. 133 Interviews 65, 72, 73, 74, 75, 79 on the latter, Interview 80 on the former. Interview 81 noted that after 2015 the MFED began to focus on developing domestic markets for the long-term, not as a financial resource for the short-term. 134 Quotes from Interviews 81, 73, and 77 respectively, but all interviewees concurred. 135 See Chart 4. 136 Quotes from Interviews 77 and 72, respectively.
81 camps pushed for bond issues but the DMO continued to resist.137 Market avoidance has continued through the era of historically-low global interest rates in the 2010s.138
The DMO uses official credit because it includes price, term, and restructuring benefits, reinforces BDP macroeconomic priorities, and includes technical assistance.
First, the DMO finds official loan terms and conditions beneficial. These benefits do not only include lower interest rates than bond markets. The DMO finds it can shop among official lenders for long maturities, can repay early if loans prove unnecessary, and assumes official creditors will be open to restructuring if exchange rate or revenue problems arise.139 In sum, the DMO finds official creditors allow them to “borrow sustainably” in comparison to markets.140 As another senior government official said, there are “stories about the benefits of issuing, [but we] just don’t buy it.”141
Second, BDP policy preferences align with official creditors’ traditional policy prescriptions, encouraging their use. Most obviously, this means the DMO does not face resistance from BDP elite constituents about using official creditors that may intervene in domestic policy.142 In fact, related not just to policy but the price and term benefits noted above, long-tenured senior officials trust the hands-on behavior of official creditors more than they do markets.143 As one banker noted, the “conservative” DMO “likes working with [official creditors’] economists.”144
137 Interviews 80, 82. 138 See Chart 1. Interviews 65, 72, 73, 74, 75, 77, 78, 79, 80, 81, 82 139 Interviews 65, 72, 73, 74, 75, 77, 78, 79, 80, 81, 82. Interviews 77, 78, and 81 discuss various benefits of different multilateral and bilateral creditors, all of which are cheaper than markets. Interviews 68, 73, and 74 note China has been tried across various projects but is now avoided due to ineffectiveness. 140 Interview 81. 141 Interview 80. 142 Interviews 65, 73, 74, 79. 143 Interviews 80, 81. 144 Interview 73.
82 Ideological alignment also leads to smooth negotiations. Since Botswana is not desperate to borrow, since official creditors like the World Bank are desperate to lend to
MICs, and since official creditors concerned with borrowers’ domestic policy trust
Botswana will pursue “good” policy, the DMO has the power to negotiate conditions to the point where they are sometimes non-existent or at least not going to change existing government policy.145 This gives the DMO “more power over [official creditors] than markets,” leading one official to say borrowing from them is “easy.”146 Indeed, some worry that such ease leads to short sighted debt management, and a missed opportunity to develop market benchmarks and relationships during good times.147
The third benefit is technical assistance. The DMO values foreign involvement in projects because it increases capacity, efficiency, and effectiveness of projects.148 While this brings bureaucratic delay, resistance to large-scale investment pushes at the national level means the DMO does not mind official lenders’ relatively slow processes.149 Others note Botswana’s landlocked position means many projects are regional, making coordination through official lenders appealing.150 Finally, DMO officials perceive bond roadshows to be just as time-consuming (on top of being expensive).151
An exception has been Chinese-funded projects, which are not only tied to
Chinese companies and workers but are rarely completed on time or on budget.152 This failure across a variety of sectors has become public knowledge and criticized by MPs,
145 Interview 82 says sometimes non-existent, Interview 79 says at least no effect. 146 Quotes from 81 and 77, respectively. 147 Interviews 65, 72, 73, 74, 75, 79. 148 Interviews 77, 78, 80, 81, 82. 149 Interview 80. 150 Interview 56. 151 Interview 80. 152 Interviews 68, 73, 74.
83 leading some bureaucrats to claim the DMO “will never use them again.”153 Regardless of fluctuations in China’s role as a lender, the DMO has continued to use official credit rather than issue bonds in response.
DMO preference for official credit is largely explained by BDP partisanship.
First, tight fiscal policy not only minimizes financing requirements but also reflects a broader emphasis on fiscal sustainability, leading the DMO to value official creditors’ interest rates, maturities, and flexibility. Second, the BDP’s preferences mirror official creditors’ traditional policy conditions, making use of official credit uncontroversial within the party or the MFED. Third, technical assistance and foreign involvement is seen by the MFED to reinforce good governance and efficiency. BDP politics create the space for the DMO to use official creditors when borrowing abroad.
Comparison and Conclusion
Botswana consistently used official external credit from 1990-2015. Over that time, global and national economic factors commonly associated with debt did not negate
DMO preference for official credit. First, the DMO continued to use official options as global interest rates reached historical lows in the 2010s. The 2014 data-point in Chart 1 reflects guarantees against no official borrowing that year. Otherwise the DMO has relied on official lenders. Low global interest rates have not changed the DMO’s valuation of the perceived benefits of official creditors.
Second, Botswana’s good credit ratings suggest Botswana could issue bonds at particularly good prices. Persistent invitations from market actors and pressure from its
153 Interview 81.
84 own central bank to issue corroborate this. But the DMO resists. In contrast, South Africa continues to issue bonds despite junk ratings and high borrowing costs. Clearly, interest rates do not shape MICs’ borrowing choices as much as partisan preferences.
Nor do economic indicators such as growth or debt shape borrowing decisions
(see Charts 5 and 6). Despite periods of low growth and rapidly increasing debt levels, private finance remains South Africa’s preference. In contrast, Botswana’s persistent growth and surpluses have not kept the BDP government from preferring official lenders.
It would be difficult to see why this has been the case without considering the effect of partisan politics.
The next chapters consider the effects of partisanship in other MIC borrowers,
Peru and Thailand. They are complex cases because government partisanship changed multiple times from 1990-2015. However, even as various parties and thus different ideologies have governed in Peru and Thailand, partisanship remains central to explaining how these MICs borrow externally.
85 Chapter 4 Charts
Chart 4: South Africa and Botswana Sovereign Credit Ratings Botswana South Africa Year Fitch Moody's S&P Year Fitch Moody's S&P 1989 / / / 1989 / / / 1990 / / / 1990 / / / 1991 / / / 1991 / / / 1992 / / / 1992 / / / 1993 / / / 1993 / / / 1994 / / / 1994 BB Baa3 BB 1995 / / / 1995 BB Baa3 BB+ 1996 / / / 1996 BB Baa3 BB+ 1997 / / / 1997 BB Baa3 BB+ 1998 / / / 1998 BB Baa3 BB+ 1999 / / / 1999 BB Baa3 BB+ 2000 / / / 2000 BBB- Baa3 BBB- 2001 / A2 A 2001 BBB- Baa2 BBB- 2002 / A2 A 2002 BBB- Baa2 BBB- 2003 / A2 A 2003 BBB Baa2 BBB 2004 / A2 A 2004 BBB Baa2 BBB 2005 / A2 A 2005 BBB+ Baa1 BBB+ 2006 / A2 A 2006 BBB+ Baa1 BBB+ 2007 / A2 A 2007 BBB+ Baa1 BBB+ 2008 / A2 A 2008 BBB+ Baa1 BBB+ 2009 / A2 A 2009 BBB+ A3 BBB+ 2010 / A2 A- 2010 BBB+ A3 BBB+ 2011 / A2 A- 2011 BBB+ A3 BBB+ 2012 / A2 A- 2012 BBB+ Baa1 BBB 2013 / A2 A- 2013 BBB Baa1 BBB 2014 / A2 A- 2014 BBB Baa2 BBB- 2015 / A2 A- 2015 BBB- Baa2 BBB- / = No Rating Data from Bloomberg Accessed December 12-14, 2016
86 Chart 5: South Africa and Botswana Annual % Growth 15.00
10.00
5.00
0.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
-5.00
-10.00
South Africa Botswana
Data from World Bank Development Indicators.
Chart 6: South Africa and Botswana External Debt Stocks (% GNI) 0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
South Africa Botswana
Data from World Bank Development Indicators.
87 Chapter 5: Peru
Introduction
Peru is a good test for showing partisanship affects MIC external borrowing. First,
Peru presents a case of shifting government partisanship over time. If my theory is correct, borrowing must covary with governing parties. Second, Peru presents a case of strong technocratic independence. If my theory is correct, external borrowing should follow partisan changes in government despite a powerful finance ministry. Specifically, the General Directorate of Treasury and Indebtedness (DTI - Dirección General de
Endeudamiento y Tesoro Público) in the Ministry of Finance and Economics (MEF -
Ministerio de Economía y Finanzas) makes national borrowing decisions. The MEF is a powerful “island of efficiency” that has maintained “neoliberal” economic policies in many areas despite the election of successive left governments since the early 2000s.1
MEF strength may lead one to expect Peru to use official creditors when turning outside for finance despite any left-leaning governments.
But Peru has pursued a balanced borrowing strategy that includes both official and private options. This balance cannot be explained without tracing government partisanship since 1990. Although MEF prefers official credit, left governments force it to issue foreign bonds it would prefer not to issue. This happens because of left parties’ spending policies and resistance to official creditor involvement in the domestic political economy.
To be sure, MEF power and preferences are important. The MEF prefers official credit not only for lower prices and technical assistance, but also because MEF can “use
1 Crabtree and Durand 2017b, chap. 4.
88 conditions to reform line ministries” and tie the hands of future governments that MEF officials fear “will be [more] anti-market.”2 Without MEF influence and preferences,
Peru may have used more private external finance in years of left governments because market demand for Peruvian debt is “huge… [foreign investors] always [say Peru] could issue more”3
But the election of successive left governments since the early 2000s has also meant the MEF cannot exclusively use its preferred official creditors. Under left governments “there are lots of voices pushing for more bonds [rather than official credit], including ministers of line ministries.”4 This is because “line ministries do not want a nanny”5 and condition-free bonds whose funds arrive rapidly helps match the financing demands of left parties’ spending programs.6 Partisan resistance to official conditions among leadership and line ministries means MEF cannot simply borrow as it sees fit when left parties are in government.
A summary was given by two former senior MEF officials: Many at the MEF
“[want] to take even more from [official creditors],” but increasing spending and pressure from left-party ministers forces bonds to be used more than many at the MEF would like.
This leads one official to predict that that the MEF will not be able to keep foreign bonds from becoming a consistently higher proportion of Peru’s debt portfolio in the
2 Quotes from Interview 92, but everyone interviewed listed some of these preferences and reasons, especially Interviews 86, 87, 88, 91, 95, 97, 99, 100. On project loans, all MEF and official lender staff interviewees noted the role official creditors have in project needs in Peru. On program loans, see World Bank 2015a, 13. 3 Quote from Interview 88. Corroborated by many, especially Interviews 92, 95, 99, 100. Interviews 99 and 100 noted that foreign demand for Peruvian debt is traditionally higher than domestic demand, and global bond issuances are often oversubscribed. 4 Interview 95. 5 Interview 87. 6 Interviews 92, 93, 98, 99, 100.
89 foreseeable future, as he suspects left-leaning parties will continue to win elections .7 In short, left parties make Peru more likely to use private sources of external finance.
This argument is expanded below. The first section outlines how Peruvian laws do not substantively constrain spending or creditor choices. The second section describes the annual borrowing process and points of partisan influence. The third section outlines
Peruvian political coalitions before tracing their effects on Peru’s external borrowing from 1990-2015, showing the effect of government partisanship despite the preferences and authority of the MEF.
Chart 1: Peru Annual Commitments (% Official) by Partisanship 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Fujimori (Right) Toledo, Humala & Garcia (Center-Left)
Data from World Bank Development Indicators, calculations by author. Accessed November 8, 2017 Partisanship from Beck et al. 2001. Note the 2001 elections were later in the year, making Toledo’s first budget and borrowing FY 2002.
7 Quote and prediction from Interview 92. Point on ministers from Interview 95.
90 Setting the Financing Requirement: Budgets and Politics
In Peru, Congress passes budgets and the MEF’s DTI is responsible for financing them. It is important to consider whether fiscal laws constrain partisan fiscal preferences, whether debt laws provide a constraint on spending, or whether there are laws about which borrowers can be used. To be sure, Peruvian fiscal and debt laws exist. But they merely set caps on spending and debt, and Congress commonly passes exceptions to these caps. Nor do debt laws say anything about which creditors must be used. Such a flexible legal framework governing the budget, debt, and borrowing creates space for partisanship to shape financing requirements and external borrowing decisions.
The 1999 Fiscal Law
The first relevant law is the 1999 Fiscal Prudence and Transparency Act. Notably, no formal fiscal law existed before 1999. As detailed below, Alberto Fujimori’s 1990-
2000 government pursued austerity, privatization, and Washington Consensus-driven fiscal policies that constrained spending without any formal law that required them to do so. The law was passed in 1999 (and not before) to institutionalize such policies in the face of both the Asian Financial Crisis and looming elections in 2000.8
While the 1999 law sets a 1%-of-GDP limit on fiscal deficits, the law also allows
Congress to pass annual exceptions that raise the limit. In practice, the exceptions have allowed deficit spending to increase up to 4% of GDP in some years.9 These exceptions have expanded the deficit in both appropriate and controversial ways. For example, exceptions easily pass during el Niño weather events that destroy infrastructure along
8 Interviews 86, 88, 89, 90, 98. 9 Lledó et al. 2017b, 61. For purposes of this research, these are more important than the overall 30%-of- GDP limit passed in 2013, which was passed too late to constrain borrowing in any serious way in the time frame of this study.
91 Peru’s coastline and lead to disaster relief spending needs. But exceptions are also controversially used by Congress with respect to economic cycles. While at some points
Congress has resisted exceptions intended to create room for counter-cyclical fiscal policies, it has also passed exceptions during positive cycles when some observers find the spending unnecessary.10
Interviewees give various interpretations of these episodes, but the general point is that “fiscal rules change so much [they recently have become just] whatever government says,” signaling the political rather than legal nature of government spending in Peru.11 Despite the ostensible 1%-of-GDP deficit limit, spending levels depend on governing party’s fiscal policy preferences.
Annual Indebtedness Laws
Within the parameters of the 1999 Fiscal Law, Congress passes three laws each
November that set national spending, revenue, and borrowing plans for the coming fiscal year. The borrowing component lays out how much borrowing will come from foreign and domestic sources.12 However, the borrowing law does no more than cap the amount to be borrowed that year, nor is there a limit on total outstanding foreign debt.13 It does not shape choice of creditor in meeting these financing requirements.14
Once borrowing ceilings are set, MEF is delegated the authority to finance the budget without further Congressional involvement. The only instance where Congress is brought back into the picture is if an emergency arises (again, el Niño is an example) or if
10 For a list of annual variations in rule application, see Lledó et al. 2017, pg 61. 11 Interview 95. 12 This is the “Indebtedness Law,” or Ley de Indeudamiento. 13 Interview 92 notes the MEF sets informal internal benchmarks, but these do not have the effect of law. 14 Interviews 92, 99, 100. For a recent example of the annual Indebtedness Law, see http://busquedas.elperuano.com.pe/normaslegales/ley-de-endeudamiento-del-sector-publico-para-el-ano- fiscal-2-ley-n-30520-1459891-3/.
92 either domestic or external financial resources dry up and the other must be increased beyond the initial limit. However, in these cases (the latter of which has never happened),
Congress only has the purview to consider the nominal amount to be borrowed, not the source of financing to be used.15
In sum, Peruvian fiscal and debt laws are flexible. While ostensible spending limits exist, they are easily and often overridden, minimizing legal constraints on partisan spending preferences. Once budgets are finalized and financing requirements go to the
MEF, there are no legal restrictions on which external creditors are used. While the preferences and independence of the MEF are central to borrowing, financing requirements remain in the first instance shaped by partisan government fiscal policy.
Borrowing Process: Informal Influences
After the budget and financing requirement are finalized, the MEF’s DTI begins gathering financing options and decides how to borrow. After creditor(s) are decided upon, the MEF writes a “supreme decree” outlining the purpose, terms, conditions, and evaluation plans for each borrowing operation. The decrees go to Cabinet for approval.16
There is no procedural difference between using official or private creditors, so no procedural difference incentivizes DTI to use one option over the other.17
While many at the MEF see their formal role in borrowing as a source of power and tool for reforming line ministries, borrowing still requires negotiation with line
15 Interviews 92, 99, 100. 16 All interviewees confirmed this process. 17 In Thailand, varied institutional processes have emerged for different creditor sources, which can incentivize Thai bureaucrats to avoid certain official sources of credit simply because they want to avoid the procedural hassle. See Chapter 6.
93 ministries and their cabinet-level political appointees. This is because, as just noted,
Cabinet approval is required of all borrowing decrees. This leads to balanced external borrowing that reflects neither MEF nor party preferences perfectly.
Line Ministries and Cabinet
Because line ministries cannot borrow on their own, MEF influences not only whether a ministry gets finance but who they get it from and the conditions that come with it.18 All interviewees agreed MEF tries to use official credit to improve technical capacity, drive reform, and affect policy in the rest of the state. In the eyes of one official who has worked in both the state and official lenders, “the MEF wants [official creditors to be] a nanny.”19 Given the MEF’s technocratic history, it is not surprising it sees conditions as a tool that makes official credit appealing.20
However, line ministries and the government push back on MEF preferences to some degree because “line ministries do not want a nanny.”21 At the most extreme, some associated with line ministries claim they “have the power” to choose creditors for projects because MEF needs Cabinet approval.22 At the least, Cabinet approval of borrowing is an important part of the process because it ensures MEF borrowing decisions must be “forward-looking to take the preferences of [ministers] into account.”23
The truth lies somewhere in between competing claims of MEF power and partisan cabinet power. Even those within the MEF who support official conditions admit
“negotiation of conditions previous to the supreme decree [and cabinet approval] is an
18 Interview 92. 19 Interview 87. 20 See Crabtree and Durand 2017b. 21 Interview 87. 22 Bunte 2013b, 78–79. 23 Ibid., 79.
94 issue” for MEF.24 Others agree “there are lots of voices pushing for more bonds [rather than official credit], including ministers of line ministries.”25 To some degree, borrowing is a point of contention where partisan Cabinet appointees keep the MEF from borrowing only from official creditors without pushback from government.
Lenders also report changes in borrowing over time reflect constraints on MEF’s ability to use preferred official credit. Some staff claim Peru only accepts conditions that reflect “policies government has already achieved.”26 Implicit here is that conditions are harder for MEF to force through under successive left-leaning governments, despite the
MEF “[wanting] to take even more from [official creditors].”27 This is why, despite official lenders’ eagerness to lend and MEF’s eagerness to use them, official loans have become less common as left-leaning parties have been in government since 2001. Instead,
Peru’s relationships with multilaterals now often take the form of small technical arrangements designed to maintain relationships rather than provide the financial basis for large projects or programs.28
Indeed, some in the DTI claim their task is simply to “maintain balance” between these options because now “some prefer multilaterals, some markets… diversification is important.”29 This reflects reality since the early 2000s, when consecutive left-leaning parties were elected and borrowing began to include a combination of private and official external credit (see Chart 1). The history of this balance is detailed in the next and final section of this chapter.
24 Interview 92. 25 Interview 95. 26 Interview 88. 27 Interview 92. 28 Interviews 84, 85, 87, 88, 92, 95, 97. The three major multilaterals in Peru are the World Bank, the IDB, and the CAF. 29 Interviews 99 and 100.
95 SOEs and Other Guarantees
Before continuing, it is important to note SOE guarantees are not a crucial issue for the MEF because there are few SOEs in Peru due to the privatization drive in the
1990s.30 One exception is the national oil company, PeruPetro, which by law maintains the ability to borrow on its own. However, to obtain a government guarantee, they must negotiate with and get approval from the MEF on a case-by-case basis. PeruPetro can and sometimes does borrow if the MEF says no, but this has not spiraled out of control as in
South Africa.31 In this respect Peru is similar to Botswana, both in having few SOEs due to privatization and in the substantial state oversight over the SOEs that exist.
Peruvian Politics & Borrowing from 1990-2015
Although the MEF holds formal autonomy over borrowing decisions, borrowing outcomes in Peru from 1990-2015 can only be fully explained by accounting for changes in government partisanship. By shaping fiscal policy and openness to official creditors, relatively left-leaning governments keep the MEF from being able to borrow completely in line with its preferences. This section first briefly summarizes the coalitions that underpin the left and the right in Peru. It then traces the history of partisan changes in government and subsequent effects on external borrowing choices.
Peruvian Politics
Peruvian politics from 1990-2015 is most simply delineated into two periods.
From 1990-2001, Peru a “semidemocratic” or “hybrid” regime with significant
30 Interviews 99, 100 also noted subnational guarantees are not an issue because they cannot borrow on their own. 31 Interview 92.
96 authoritarian tendencies under Alberto Fujimori.32 Fujimori resigned in 2001 and regular competitive elections made Peru more democratic country from 2002-2015. In both periods parties were weak, as even Fujimori attached himself to no fewer than three
“disposable parties” throughout his decade in power.33 The trend of parties as “minimalist organizations that are created for a single election and then discarded” 34 continued through the 2000s, as aspirational leaders sought to establish themselves as
“independientes,” personalistic candidates explicitly unaffiliated with institutionalized parties.35 This leaders’ relationships to coalitions are more indicative of Peruvian politics than tracing the success or failure of parties.
A useful reference point for outlining Peruvian political coalitions from 1990-
2015 is the combination of economic and security crises the country faced in the late
1980s and early 1990s. As detailed more below, Peru faced near-catastrophic economic crisis in this period. Fujimori won the 1990 election and provided a rapid economic turnaround by following neoliberal orthodoxy. Privatization alongside trade and investment liberalization obtained domestic and global business support. Fujimori also filled economic ministries with technocrats from domestic and foreign financial and extractive sectors, which ensured business interests and neoliberal economic orthodoxy
“capture[d] the state.”36 Ultimately, “like Pinochet” in Chile, “this about-turn in economic performance won [Fujimori] the support of the business sector and the right, as well as reassuring international financial institutions” and global markets.37
32 Levitsky 1999a; Crabtree 2001a. 33 Levitsky 1999a, 82. 34 Ibid. 35 Crabtree 2001a, 297; Barr 2003a; Tanaka 2011; Avilés and Rosas 2017a. 36 Crabtree and Durand 2017b, chap. 4. 37 Crabtree and Durand 2017a, 78.
97 At the same time, insurgent domestic terror groups were a major security issue.
This security threat helped Fujimori to justify and successfully execute a military-backed autogolpe (self-coup) in 1992 that suspended the Constitution and eliminated legislative and judicial checks to consolidate extensive power in the executive.38 Accordingly, the military, business, and the technocracy came to constitute a narrow but powerful elite coalition that underpins the Peruvian right.
This coalition’s dominance through the 1990s was aided by a fragmented left.
Izquierda Unida (United Left), a formal coalition of left-leaning parties, fell apart in the late 1980s as its moderate and radical elements could not coalesce around a clear leader or program of policy responses to economic and security crises.39 Unions were greatly affected by this disorganization as privatization and neoliberal labor programs under
Fujimori meant “organized labor… virtually ceased to exist in the 1990s.”40 Pro- democracy groups comprised of the urban middle class, which might have provided a platform for broad but organized left-leaning coalitions, failed to gain legitimacy despite the autogolpe and executive concentration of power in the 1990s.41
After Fujimori through 2015, successful presidential candidates ran on left leaning policies but often softened many of these positions once in office (save looser fiscal policies, as detailed later) to appease national and international economic elites.42
Many see this as a predictable outcome given the minimalist neoliberal state that solidified under Fujimori.43 Despite a persistent demand for state contributions to “public
38 Levitsky 1999a; Crabtree 2001a; Kelly 2003. 39 Cameron 1994; Van Dyck 2018. 40 Levitsky 1999a, 83. 41 Ibid., 82–84. 42 Barr 2003a; Burron 2011; Avilés and Rosas 2017a; Crabtree and Durand 2017b. 43 Crabtree and Durand 2017a.
98 services, works and infrastructure, and social welfare programs,” state capacity remained low and representatives of those interests found themselves relegated to grass-roots organizations rather centralized national organizations or state institutions.44 The fragmentation of labor and civil society that led to Fujimori and the neoliberal state in the
1990s persisted through 2015.45
In sum, a narrow but powerful conservative elite and fragmented left define
Peruvian politics. But the left is not entirely impotent, as left-leaning candidates ultimately pursued various degrees of looser fiscal policy and increases social spending, some anti-privatization policies, and softer approaches to labor rights than the conservative Fujimori government.
Given this context, it is not surprising that the most dramatic shift in Peru’s borrowing strategy came in 2002, the year of Peru’s first bond since 1928.46 This was the first year of President Alejandro Toledo’s government, whose fiscal, spending, and privatization policies explicitly moved left of Fujimori’s austerity and approach to labor.
Despite persistence of neoliberal orthodoxy in many other policy areas, and despite prior and later points where issuing may be expected instead, the Toledo government’s limited but important shift left explains why Peru’s borrowing strategy changed when it did.
Since, the role of bonds increased as successive left-leaning presidents increased spending levels and resisted conditions, despite MEF efforts to maximize use of official credit. The remainder of this section details that borrowing history.
44 Panfichi 2011, 95; Avilés and Rosas 2017a. 45 Avilés and Rosas 2017a; Crabtree and Durand 2017b. 46 Rossini and Santos 2015, 24.
99
The Late 1980s
Alan Garcia was elected president in 1985 and explicitly pursued anti-Washington
Consensus economic policies until the end of his term in 1990. Particularly relevant to this study were overt rejection of IMF conditionality, default on foreign debt by limiting repayments to 10% of exports, and pro-cyclical stimulus spending. Despite some early success, by the 1990 elections the Garcia economic program had left Peru in a near- catastrophic economic and debt position.47 Notable indicators include negative growth (-
9% in 1988), massive inflation (3,000% in 1989 and 7,000% in 1990), and unemployment (formal employment dropped to 11% in 1990). This led to national revenue shortfalls and an inability to meet even the self-imposed 10%-of-exports debt repayment limit.48
By 1990, Peru had burned relationships with foreign creditors of all stripes.49
Coherent solutions were beyond the capacity of an increasingly fragmented left and the economic problems led to a substantial decline in established political parties generally.50
This created the space for a new economic program under 1990 election winner Alberto
Fujimori.51
Alberto Fujimori (1990-2001)
47 On changes in debt and borrowing over the course of Garcia’s term, see Aggarwal and Cameron 1994, 66–76. 48 Crabtree and Durand 2017b, chaps 2–4. 49 Ibid.; Aggarwal and Cameron 1994, 70–75. 50 St. John 2010, 3–4; Levitsky 1999b. On the long history of the fragmented left in Peru, see Crabtree and Durand 2017b. 51 Aggarwal and Cameron 1994, 75.
100 Fujimori was elected in 1990 by campaigning against the Washington Consensus program of his opponent.52 Yet campaign rhetoric did not match Fujimori’s policies in office. Part of the reason for the shift was following the Washington Consensus on economic policy helped Fujimori limit foreign criticism of his authoritarian domestic policies. Relatedly, economic officials from the IFIs, the US, Japan, and others insisted on such policies given the economic problems Peru faced when he took office. Finally, since Garcia’s policies had left Peru in such a dire economic position and fighting domestic terrorism was the primary political issue, there was little domestic resistance to neoliberalism at the time.53
Before his inauguration, Fujimori ostracized left-leaning advisors from his campaign and instead named technocrats from IFIs and the business community to top economic positions. This allowed the MEF to accumulate an unusual amount of autonomy, side step the possible moderating influences of legislative and other political forces, and unilaterally instill Washington Consensus policies immediately. The MEF was able to sustain that economic program through Fujimori’s full decade in office.54
Particularly relevant here is that tight fiscal policy was central to the Fujimori years. Reductions in public employment levels and wages, subsidy elimination, and general social program cuts decreased government spending. Privatization and new taxes simultaneously increased revenue. Some targeted spending took place to mollify rural
52 Conaghan 2005, 17; Stokes 2004, 2. 53 On all these points, see Levitsky 1999b; Conaghan 2005, chap. 1; Wise 2003, 179; Stokes 2004, 69–71; St. John 2010, 2–6. Also Interviews 86, 87, and 101. 54 Interview 101. Crabtree and Durand 2017b, chap. 4; Stokes 2004, 70; Wise 2003, chap. 6.
101 constituents, but Fujimori’s fiscal policy was otherwise austere. The focus on austerity continued throughout the 1990s, allowing Peru to achieve surpluses by 1996.55
Austere fiscal policy shaped the Fujimori government’s external borrowing strategy of strictly using official creditors: “Fiscal consolidation… [Meant that] public sector borrowing requirements were covered with privatization receipts, multilateral lending, and debt rescheduling (public and private creditors), with no need for borrowing in international capital markets.”56
To be sure, IMF last-resort lending was central to avoiding catastrophe in 1990-
1992 and reinforced Fujimori’s economic program. But sole use of official creditors throughout the decade was not a foregone conclusion. The Fujimori government could have issued bonds, especially during his second term from 1995-2000. Market access had returned by then, signaled by the setting of credit ratings.57 In fact, ratings in the late
1990s under Fujimori were higher or equal to what they would be when successor governments issued in later years.
Moreover, re-election campaigns and debt management needs provided political- economic reasons to issue these years. But despite reasons and opportunities for accessing bond markets, sustained government preference for tight fiscal policy and
Washington Consensus orthodoxy explain Peru’s strict use of official credit throughout the entirety of Fujimori’s time in office.58 These points are detailed in turn here.
55 Rossini and Santos 2015, 14–17; On minimal, targeted spending see Schady 2000; Wise 2003, 190. See also further discussion below, based on Interview 101. 56 Rossini and Santos 2015, 20. 57 See Table 1 58 See Chart 1
102 First, Fujimori’s re-election campaigns in 1995 and 2000 did not encourage a shift away from fiscal austerity or issuance of bonds. In 1995 some geographically targeted spending took place via FONCODES, but this relatively small move did not affect
Fujimori’s austerity drive writ-large.59 In fact, when research in the planning stage of the program showed the allocated FONCODES funds would be insufficient, Fujimori became personally involved in resisting any moves to increase program resources.60
While before the 1995 election Peru still had a weak economy and no credit ratings, these circumstances changed before the 2000 elections. The government could have tapped markets to increase pre-election spending. Instead, it passed the 1999 Fiscal
Rule referred to earlier in this chapter, symbolic of the sincerity with which the Fujimori government and its business-oriented finance ministry took the Washington Consensus.
Chart 2 shows a small dip into deficit territory 1999 and 2000, but this was due more to revenue problems during a general slowdown at the end of the 1990s than to any slight increase in spending.61
Second, the 1990s included multiple debt-restructuring events in the region where the Fujimori government could have entered global bond markets. The issue here is not whether entering markets was prudent or not—the point is that if the government wanted to draw on capital markets, it could have. But the Fujimori government did not do so.
One possibility was borrowing after the Brady Bond program in 1997. Brady
Bond restructuring occurred after Peru had achieved high growth rates from 1993 to 1997 and surpluses in 1996 and 1997.62 Furthermore, in 1997 Peru also asked for and received
59 Schady 2000. 60 Interview 101. 61 Interview 98. See also Rossini and Santos 2015, 22–24. 62 See Chart 2.
103 its first credit rating (from Standard & Poor’s).63 Although it was sub-investment grade, a credit rating meant that commercial markets for Peruvian debt were on the minds of the
MEF and investors. Indeed, 1997 was not the first year that Peru “normalized relations with all external creditors,” suggesting that policy moves throughout the decade were explicitly designed to get Peru back into capital markets.64 Together, these factors suggest that Peru could have accessed private finance in 1997. But it did not.
Why did Peru not tap external markets in 1997? One interviewee said the MEF resisted bonds because (1) they were comfortable with official creditors and (2) foreign investors were available but they were mostly hedge fund rather than institutional investors, so “not the type of investors Peru wanted.”65 Other interviewees agreed, saying issuing “could have happened but it would not have been smart.”66 And this is precisely the point. It was Peru’s choice. The Fujimori government had market access and decided it did not fit their preferences. Instead, it chose to continue using official creditors even after the economy had stabilized and market access had returned in the second half of the
1990s. To be sure, as various crises hit emerging markets elsewhere in 1997 and 1998, the government had further reason to avoid foreign capital markets. But the sequence of all these events suggests these events reified rather than shaped the Fujimori government’s borrowing preferences.
After S&P gave Peru its first credit rating in 1997, Peru obtained ratings from the other two major agencies by 1999.67 This means that after the crises elsewhere in 1997-8,
63 See Table 1. 64 Rossini and Santos 2015, 20–22 on Paris Club restructuring in the first half of the 1990s. Also Interviews 98, 99, 100. 65 Interview 98. 66 Interview 92. 67 See Table 1.
104 Peru was again positioned to use private external finance. One multilateral interviewee suggested Peru did not issue in these years because the ratings were sub-investment grade.68 However, as shown below, not only did later governments issue before Peru reached investment grade, they issued when both S&P and Fitch rated Peru lower than they had under Fujimori. This is why a former MEF official feels Peru should have shifted to a market-based financing strategy at the end of the Fujimori years.69
All this is to say that Peru could have begun to use global bond markets in the latter half of the 1990s, but chose not to. Instead, the Fujimori government used official credit because it reinforced its macroeconomic preferences.
Alejandro Toledo (2001-2006)
The neoliberal approach to economic policy and strict use of official creditors continued through Fujimori’s third election in 2000. However, an accumulation of political oppression and corruption led to Fujimori’s resignation and exile soon after. A transition government briefly took over before Alejandro Toledo won a snap 2001 election.70
Toledo campaigned on populist economic policy promises, but after taking office his government continued the Fujimori status quo in some important ways. Once elected, the need to attract capital and ensure market confidence took over, symbolized by the decision to name people preferred by foreign and domestic business and finance to lead
68 Interview 88. 69 Interview 98. 70 St. John 2010, chap. 1; Barr 2003b, 1165–1166; Crabtree 2001b.
105 the MEF and other economic ministries. In terms of policy, monetary and trade policy continued to follow the Fujimori neoliberal program.71
However, outside of monetary and trade policy, Toledo brought a few important changes that affected fiscal policy and thus borrowing. In particular, a softer approach to privatization and an increase in spending shaped Peru’s fiscal position and use of external financial options. These few but important economic policy changes under Toledo help explain why Peru began to issue bonds on global markets during Toledo’s first year.
First, privatization revenues that helped bring back budget surpluses in the 1990s had slowed by the time Toledo took office.72 While initially considering further privatization, Toledo changed course to “[signal] a move to the left.”73 Such moves led some MEF and other market-friendly ministers to resign from Toledo’s government, and in part were responsible for a credit rating downgrade early in Toledo’s term (see Table
1).74 This negatively affected the revenue side of Toledo-era budgets, alongside a generally sluggish economy handed over from the end of Fujimori’s time in office.75
Second, Toledo pursued a new set of spending priorities that were decidedly less conservative than Fujimori. In part meant to appease a broader base than Fujimori and in part to pursue a counter-cyclical approach in reaction to the sluggish economy, Toledo increased public sector employment and wages, put public money toward roads and energy, and increased education spending.76 Business community opposition and MEF
71 Interviews 86, 93, 101; St. John 2010, 35. For the ‘three islands of efficiency’ that have persisted in the Peruvian state through different governments, of which the MEF is one alongside the central bank and the tax ministry, see Crabtree and Durand 2017b, chap. 4. 72 Rossini and Santos 2015, 25. 73 Barr 2003b, 1166. 74 Ibid., 1165–1169; St. John 2010, 39–40. 75 Interview 98. 76 St. John 2010, chap. 3.
106 influence limited the scope of these efforts, with some initial Toledo programs delayed until the “Programa Juntos” spending plan began in 2005.77 But there is no question that, from the beginning, Toledo had a looser approach to spending than Fujimori, designed for a relatively broader, popular constituency.78
This increase in spending despite revenue problems, as an effort to appeal to a broader constituency than Fujimori, helps explain Peru’s first modern foreign bond in
2002. Slow growth, counter-cyclical fiscal policy, a few high-profile anti-privatization moves, and subsequent credit rating downgrades may make it surprising that Peru would begin to access markets at this time. Moreover, the MEF was able to secure financing from a combination of multilateral and bilateral lenders in 2001 to help fund a part of
Toledo’s job-creation spending efforts.79 But Toledo’s shift left from Fujimori these key policy areas are key to explaining why private finance was used in 2002 and not before or after. In short, in the words of one former MEF official, Peru “had to use bonds to help finance Toledo’s spending.”80 Toledo’s partisan privatization and fiscal policies underpinned external borrowing choices.
The same official recalled how difficult it was to convince long-term members of the MEF to support the issuance. Many new Toledo-era MEF officials wanted to issue in order to increase reserves, restructure existing debt more than had been done under Brady
Bonds, and begin building relationships and yield curves with a view to long-term market-based government financing strategies. But the preference among MEF staff remaining from the Fujimori government was still to maximize official credit. Only when
77 Interview 101. See also Alejandro Toledo: ‘Implementamos muy tarde el programa Juntos’ 2011. 78 Barr 2003b, 1165–1166; St. John 2010, 35. 79 St. John 2010, 37. 80 Interview 98. In particular, the commodity boom had not started in 2002.
107 the World Bank, IMF, investment banks, and a few long-respected members of the
Peruvian economic policy-making community began to comment publicly that bond market risks could be managed did “new people convince older people [at the MEF] that
[bond] markets can be good.”81 This not only illustrates the importance of orthodox preferences of the MEF vis-à-vis elected governments in Peru, but also that governments can in turn affect MEF policy after they come in.
After the initial bond issuance, the commodity price boom led to substantial growth through the rest of Toledo’s time in office. This had a positive impact on government revenues and helped finance the various spending initiatives Toledo had begun in his first year by using a mixture of official and private external credit.82 This minimized the need for new levels of bond issuance, so the MEF largely issued after the boom began only when restructuring opportunities were available.83 A sign of this is the trend of lower interest rates for each consecutive external Peruvian bond (see Table 2).
True to its preferences, the MEF continued to use official creditors in the context of the boom, in order to continue driving reforms in the economy and other parts of the state.84 But the small, important shift left under Toledo explains the balanced use of markets alongside official credit in the early 2000s.
Alan Garcia (2006-2011)
Alan Garcia, the former President who had rejected the IMF and purposefully defaulted on foreign debt in the late 1980s, won the 2006 election. While this time he ran on a more moderate platform and installed a business-friendly economic leadership team,
81 Interviews 98, 101. See also Rossini and Santos 2015, 24-25. 82 Interview 91. 83 Interview 98. 84 Interview 87.
108 Garcia did not leave his anti-Washington Consensus.85 In fact, some credit Garcia’s re- emergence in the 2000s for pushing Toledo’s policies left while in office, seeing Toledo’s spending as an effort to appeal to Garcia’s left-leaning followers.86 Garcia followed through on his campaign and expanded on Toledo’s spending programs after taking office in 2006.87
The commodity boom continued until 2008, meaning revenues could pay for the sustained spending levels in Garcia’s first years back in office. 2007 bonds were issued to restructure rather than meet new financing needs.88 However, Garcia’s government also began to resist budget support and development policy loans from official creditors, preferring to restrict use of official credit to projects and increase use of bonds for general budget purposes.89 While many economic policy reforms supported by conditionality had been achieved in Peru since Fujimori, conditionality still included reforms that were politically challenging to take on given Garcia’s broader, left-leaning constituency.
These included second generation reforms, which go beyond macroeconomics.
They seek to reform judicial, regulatory, governance, and civil service institutions, making the politics of second generation reforms as controversial as macroeconomic reforms. While economic policies were often implemented rapidly and technocratically, second generation reforms that seek “deep changes in… regulatory systems [could] hardly be carried out without lengthy discussion and the participation and technical
85 See Alan Garcia’s second chance; Peru 2006. 86 Barr 2003b, 1169; St. John 2010, 39–40. Also Interview 98. 87 Interviews 98, 99, 100. 88 Interviews 99, 100. 89 Interviews 84, 87.
109 expertise of the affected parties.”90 The particular content of second generation reforms varies91 but they affect a broader array of groups.
Accordingly, the Garcia government preferred to avoid program loans that would seek such politically challenging reforms. The MEF under Garcia could thus only use official creditors for project loans with conditions limited to the project or for technical assistance agreements designed to maintain relationships.92 For Garcia, conditionality that would affect his comparatively broader and left-leaning constituency made official credit less appealing and this constrained MEF financing choices.
In 2008, uncertainty arising from the global financial crisis led Peru to use official financing entirely, despite receiving investment grade credit ratings from Fitch and S&P the same year.93 In 2009, a sharp drop in commodity prices affected Peruvian government finances. In response to the dip in revenues and sluggish growth in the aftermath of 2008 and 2009, the Garcia government not only sustained but increased spending, pursuing a large counter-cyclical infrastructure investment plan. This made external financing imperative.94 Though PPPs were central to this infrastructure investment, public budget allocations and thus government financing requirements increased substantially.95
In a marked shift in borrowing strategy, Peru issued foreign bonds in 2009 and
2010 to fund this requirement. Due to increased resistance to conditionality in Garcia’s early years, the government now issued bonds despite lingering uncertainty after the crisis and MEF preference for official credit for infrastructure projects. Without
90 Navia and Velasco 2003, 268. 91 Rodrik 2006. 92 Interviews 84, 87, 88. 93 See Table 1 and Chart 1. 94 Furthermore, a domestic bond at the end of 2007 was undersubscribed, shifting emphasis further onto external resources in the following years (Interviews 99 and 100). 95 Interviews 97, 99, 100. See also Cox 2010.
110 government concern about conditions, Peru would have likely continued emphasizing official credit. Instead, official credit became a supplement to the Garcia government’s prioritization of bonds—it “helped diversify [from over-exposure to market].”96 As the crisis subsided in 2011, Peru in fact paid back outstanding official credit early to move itself further away from World Bank and Inter-American Development Bank commitments.97
It is useful to recall the opposite response to external crises and slow growth adopted by the right-leaning Fujimori government. In the context of slow growth in the mid 1990s, Fujimori continued to emphasize fiscal surpluses rather than increasing spending to pursue counter-cyclical policies. Garcia took a different approach, increasing spending in response to slow growth that led to higher financing requirements. While global uncertainty reified Fujimori’s aversion to bonds, Garcia’s government pursued a bond-funded investment program despite similar uncertainty. Partisan differences explain the variance in the external borrowing strategies pursued by two Peruvian governments facing similar domestic and global economic conditions.
Ollanta Humala (2011-2016)
After losing to Garcia in 2006, Ollanta Humala was elected President in 2011.
Despite a campaign that emphasized populist rhetoric, some policy concessions to business and cabinet appointments that omitted left-leaning advisors from the campaign eased initial market jitters following his election. In this way Humala continued the post-
96 Interview 99. 97 Interview 84. The CAF maintained a more significant lending relationship with Peru than these two larger development banks.
111 Fujimori pattern of mismatch between populist campaign rhetoric by successful candidates and limited implementation of such policy in office.98
Yet Humala did move further left with respect to the crucial area for this study, fiscal policy. Government spending on both social programs and infrastructure increased as promised during the campaign.99 A return of the commodity boom after the global financial crisis allowed these spending increases to be covered by revenue gains.100 This meant that spending increases did not threaten Peru’s fiscal position, so there was little controversy about spending increases at the time. Ratings agencies even cited Humala’s social and capital spending as reason for upgrading Peru in 2011.101
However, the commodity boom ended by 2014.102 This led to a sharp revenue decrease, causing fiscal problems due to the spending established in the first half of
Humala’s term. In reaction, the government pursued counter-cyclical policy that both cut taxes and increased spending.103 Chart 2 shows the effects, with spending increasing to new levels in 2014 and a rapid move into deficit by 2015. Accordingly, sizable and urgent financing requirements emerged in the second half of Humala’s term.104
To be sure, the end of the commodity boom is the context for this change in fiscal position. But the effect was severe only because Humala followed through on spending promises despite economic conditions. In other words, the political necessity of maintaining spending levels was central to the severity of Peru’s post-commodity boom
98 St. John 2006; Avilés and Rosas 2017b, 162–170. 99 For an overview in English, see Factbox: Peruvian leader Humala’s policy promises 2011. 100 All interviewees pointed to the role of the commodity boom in creating uncontroversial spending room in these years. 101 See quote from S&P analyst in Cordeiro 2011. Also see Chart 2. 102 Gauss 2014, 3; Life after the commodity boom 2014. 103 Interview 92. See also Kozak 2014. 104 Interviews 92, 99, 100.
112 fiscal position and financing requirements. Indeed, public wages, health, and education spending increases had to be maintained due to strikes and constituent pressure from the left.105 Other governments with other core constituencies may not have pursued the same post-boom spending levels as Humala.
In the context of borrowing, commodity boom-driven growth allowed MEF to borrow relatively little in 2011-2013 and emphasize small official loans focused on technical assistance when doing so. An exception was the 2012 $500m USD fixed-rate,
40-year bond, the lowest interest rate the country had attained to that point (see Table 2).
The issuance was a debt management operation that allowed the MEF to extend maturities and take on fixed, lower interest rates compared to existing debt.106
But after the boom, private external finance again became important due to larger financing requirements that could not be covered by small official loans. As always, the
MEF did maximize its official options that did not substantial conditionality. First, MEF disbursed unused World Bank commitments from 2009 and 2010.107 These Deferred
Drawdown Options (DDOs) were contingent credit lines where conditions have already been met. Made with an eye to both the 2008 financial crisis and natural disasters but left unused, they came in handy for a MEF that needed to react to the post-boom financing requirements.108 Second, the MEF used its strong relationship with CAF to borrow relatively condition-free from its regional official creditor.109 But these loans were not
105 Interviews 86 and 92. For news covering one 2012 sequence exemplifying this pressure from the left shaping Humala spending, see the following two articles: Taj and Wade 2012, 20; Peru’s doctors end long strike after Humala grants pay hike 2012. 106 Interviews 92, 99, 100. 107 See three largely unused DDOs committed in 2009 and 2010 in World Bank 2015, 52, Table V1.2. 108 Interviews 87 and 92. 109 Interview s 84 and 97. See footnote 80. In fact, the CAF became the largest multilateral lender for Peru in this period.
113 large enough on their own to cover Humala’s financing requirement after the end of the commodity boom.
Accordingly, 2014 and 2015 also saw an increase in external bonds. In 2014, Peru issued another version of the 2012 $500m USD bond noted above.110 While this helped restructure for debt management purposes, fulfilling new financing requirements and benchmarking in anticipation of further issuances also explain the bond.111 In other words, persistently increasing spending in the context of decreasing revenues forced the
MEF to focus on markets again.
In 2015, Fiscal Law exceptions were passed and Peru moved into fiscal deficit.112
This move explains the issuance of three large bonds, in both USD and EUR this time, totaling over $3bn USD in value.113 Low interest rates were appealing, but the MEF’s preferred strategy of emphasizing official creditors was untenable given the second generation conditions that would come with official loans large enough to cover the increased financing requirement. MEF did continue to use official credit as much as possible, which is why 30% of new debt in 2015 was official. But with Humala’s left- leaning constituency and sustained spending, it was inevitable that MEF had to turn to markets to cover the majority of larger financing requirements at the end of the boom.
As one MEF official observed, the government “had to finance all this infrastructure and social spending…[that would be] political suicide [to stop].”114 A multilateral official agreed it would be “wishful thinking” to think the fiscal position and
110 There was also a large domestic issuance meant to de-dollarize existing Peruvian debt. 111 Interviews 92, 99, 100. See also Aquino 2014. 112 Interviews 92 and 97. See Chart 2 113 See Table 2. 114 Interview 95.
114 financing requirements would change anytime soon.115 With respect to borrowing, the former MEF official cited in this chapter’s introduction said this situation meant bonds had to be central to financing strategy—official creditor conditions meant bonds were needed under persistently left-leaning governments.116 Ultimately, even with a powerful
MEF that preferred tight budgets and official creditors, left-leaning governments that increased spending and resisted conditions meant Peru was primarily using private external resources by 2015.
Conclusion
Peru is a tough case for this study’s thesis: despite a powerful state ministry like the MEF with a particular set of borrowing preferences, external borrowing remains in large part a product of fiscal policy, views of conditionality, and thus government partisanship.
This does not mean MEF power and preferences are unimportant. The MEF’s conservatism moderates the effect of left-leaning partisanship on borrowing, helping to explain the relatively balanced use of official and private credit in Peru despite shifts in government partisanship to the left over time. However, the balance also cannot be explained without understanding that the MEF is constrained by the economic policy and borrowing preferences of changing governments.
Finally, it is clear that national and global economic conditions cannot fully explain Peruvian external borrowing choices. Obtaining credit ratings or achieving
115 Interview 97. 116 Interview 92. As a corollary, the official expects fiscal rules will continuously be overridden to create room for these governments’ spending.
115 investment grade ratings did not determine when Peru first issued or continued to issue.
They set a price point for Peru’s market access, but they do not explain the government’s use of that market access. Similarly, while growth (especially during the commodity boom) affected government revenues and thus the government’s financing requirement, growth remains only part of the borrowing story. Low growth led to issuing in some years (2009, 2014, 2015) but not in others (the late 1990s). Different borrowing choices in periods of low growth reflect the important effect of partisan economic policy programs on borrowing choices in MICs.
With respect to global conditions, Peru reacted differently to the 2008 global financial crisis than it did to emerging-market crises of the late 1990s. If external crises shaped borrowing, Peru would have behaved the same in the 1990s and in 2008 despite variance in government partisanship. However, this was not what happened. Peru borrowed differently in each episode due to the different partisan leanings of the Fujimori and Garcia governments.
In sum, national and global economic conditions cannot fully explain Peru’s annual external borrowing decisions. Despite the influential and relatively independent
MEF, and even when accounting for global and national economic factors, Peru’s external borrowing choices were to a large extent shaped by government partisanship from 1990-2015.
116 Chapter 5 Additional Charts and Tables
Chart 2: Peru Central Government Fiscal Balance and Expenditure Levels (% of GDP) 20.0
15.0
10.0
5.0
0.0
-5.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
-10.0 Gross Operating Balance Expense
Data from IMF Government Finance Statistics Accessed November 8, 2017
117
Table 1: Peru Sovereign Credit Ratings (year-end) Year Fitch Moody's S&P 1989 / / / 1990 / / / 1991 / / / 1992 / / / 1993 / / / 1994 / / / 1995 / / / 1996 / / / 1997 / / BB 1998 / / BB 1999 BB Ba3 BB 2000 BB Ba3 BB- 2001 BB- Ba3 BB- 2002 BB- Ba3 BB- 2003 BB- Ba3 BB- 2004 BB Ba3 BB 2005 BB Ba3 BB 2006 BB+ Ba3 BB+ 2007 BB+ Ba2 BB+ 2008 BBB- Ba1 BBB- 2009 BBB- Baa3 BBB- 2010 BBB- Baa3 BBB- 2011 BBB Baa3 BBB 2012 BBB Baa2 BBB 2013 BBB+ Baa2 BBB+ 2014 BBB+ A3 BBB+ 2015 BBB+ A3 BBB+ Data from Bloomberg Accessed December 12-14, 2016
118 Table 2 Bond Data from MEF Accessed December 8, 2017 21-jul-25 21-jul-25 21-jul-25 14-oct-14 21-feb-12 21-feb-12 06-feb-15 06-feb-15 Fecha de de Fecha 21-nov-33 21-nov-33 21-nov-33 21-nov-33 18-nov-50 18-nov-50 18-nov-50 18-nov-50 15-ene-08 25-ago-27 30-ene-26 14-mar-37 30-mar-19 01-mar-30 03-may-16 03-may-16 Vencimiento 9.1250 9.1250 9.1250 9.8750 9.8750 8.7500 8.3750 7.5000 8.7500 7.3500 7.3500 8.3750 8.7500 6.5500 7.1250 7.3500 8.7500 5.6250 5.6250 6.6250 6.6250 4.1250 2.7500 3.7500 Tasa Cupón (%) Tasa 9.4810 9.4810 9.3500 9.4300 8.8360 8.3960 7.5500 8.1370 7.3500 7.2500 5.8700 6.4300 6.5500 7.1960 6.9500 6.1600 5.8750 5.3600 4.9000 4.7280 4.1500 2.7510 3.7730 10.1000 Rendimiento Rendimiento (%) Histórico Emisiones de Bonos Globales - Prueba Histórico Globales Emisiones Bonos de 84,636,000 500,000,000 922,983,000 500,000,000 500,000,000 250,000,000 500,000,000 500,000,000 650,000,000 400,000,000 750,000,000 500,000,000 832,895,000 500,000,000 500,000,000 545,000,000 1,201,667,000 1,000,000,000 1,000,000,000 1,260,803,000 1,000,000,000 1,250,000,000 1,100,000,000 1,000,000,000 Monto Emitido 14,497,984,000 14,497,984,000 1,922,983,000 1,922,983,000 1,250,000,000 500,000,000 650,000,000 1,650,000,000 2,119,198,000 2,000,000,000 2,260,803,000 500,000,000 500,000,000 1,795,000,000 1,100,000,000 1,000,000,000 2,750,000,000 USD USD USD USD USD USD USD EUR USD USD USD USD USD USD USD USD USD USD USD USD USD USD EUR EUR USD USD USD USD EUR USD USD USD USD USD USD USD EUR EUR USD EUR Moneda 5 años 10 años 10 años 12 años 12 años 30 años 12 años 10 años 30 años 20 años 20 años 12 años 30 años 30 años 10 años 20 años 30 años 40 años 40 años 40 años 40 años 12 años 10 años 14 años Plazo (original) Página 1 Página 19-jul-05 09-jul-09 Emisión 03-dic-02 15-dic-05 14-oct-04 21-feb-02 21-feb-02 06-feb-03 03-feb-05 01-feb-12 29-abr-10 Fecha de de Fecha 21-nov-03 18-nov-10 07-nov-14 03-nov-15 25-ago-15 10-mar-03 14-mar-07 14-mar-07 14-mar-07 30-mar-09 26-mar-15 01-mar-16 03-may-04 13-jul-05 06-jul-09 12-dic-05 06-oct-04 30-oct-14 27-oct-15 07-feb-02 07-feb-02 23-feb-07 23-feb-07 23-feb-07 23-feb-16 26-abr-04 15-abr-10 Fecha de de Fecha 25-nov-02 14-nov-03 10-nov-10 30-ene-03 27-ene-05 25-ene-12 18-ago-15 03-mar-03 25-mar-09 19-mar-15 Colocación Total Total Total Total Total Total Total Total Total Total Total EMISIONES INTERNACIONALES DE BONOS - OCTUBRE 2017 - OCTUBRE DE BONOS EMISIONES INTERNACIONALES Denominación Bono Global 2012 Global Bono 2012 Global Bono 2008 Global Bono 2015 Global Bono 2015 Global Bono 2033 Global Bono 2016 Global Bono 2014 Global Bono 2033 Global Bono 2025 Global Bono 2025 Global Bono 2016 Global Bono 2033 Global Bono 2037 Global Bono 2019 Global Bono 2025 Global Bono 2033 Global Bono 2050 Global Bono 2050 Global Bono 2050 Global Bono 2050 Global Bono 2027 Global Bono 2026 Global Bono 2030 Global Bono Total General EmitidoGeneral Total DIRECCIÓN GENERAL DE ENDEUDAMIENTO Y TESORO PÚBLICO Y DEENDEUDAMIENTO DIRECCIÓNGENERAL FINANCIEROS DIRECCIÓNDEDEGESTIÓNMERCADOS Norma Norma Legal D.S. Nº 021-2002-EF D.S. Nº 021-2002-EF D.S. Nº 182-2002-EF D.S. Nº 007-2003-EF D.S. Nº 027-2003-EF D.S. Nº 165-2003-EF D.S. Nº 055-2004-EF D.S. Nº 135-2004-EF D.S. Nº 015-2005-EF D.S. Nº 080-2005-EF D.S. Nº 162-2005-EF D.S. Nº 014-2007-EF D.S. Nº 065-2009-EF D.S. Nº 102-2010-EF D.S. Nº 223-2010-EF D.S. Nº 020-2012-EF D.S. Nº 298-2014-EF D.S. Nº 053-2014-EF D.S. Nº 230-2015-EF D.S. Nº 230-2015-EF D.S. Nº 027-2016-EF D.S. Nº 092-07, 065-09-EF Operaciones de Endeudamiento de Operaciones Deuda de Administracion de Operaciones DIC DIC JUL JUL FEB FEB FEB FEB FEB Mes ABR OCT NOV MAY NOV NOV NOV MAR MAR MAR MAR MAR AGO Financió IntercambioFinanció de Bonos Prepagos Financió al Tesoro la del año devolución 2011 y el prefinanciamiento Público (D.U.Financió Nº 028-2010) prefinanciamiento Financió Leyenda OE OAD: 1/ 2/ 3/ 4/ OE OE OE OE OE OE OE OE OE OE Tipo OE 4/ OE 4/ OE 4/ OE 4/ OE 4/ OAD 1/ OAD 2/ OAD 2/ OAD 1/ OAD 2/ OAD 1/ OE/OAD 3/ Año 2002 2003 2004 2005 2007 2009 2010 2012 2014 2015 2016
119 Chapter 6: Thailand
Introduction
Thailand is frequently studied in global finance due to its role in the 1997 Asian
Financial Crisis (AFC). Many analyze how protecting fixed exchange rates, banking sector debt, poor governance, and speculative foreign inflows led to the crisis, as well as the effects of policy interventions after the crisis hit.1 The severity of the AFC makes it central to understanding even those parts of the economy that were not responsible for the crisis, such as government borrowing.2
Even so, partisanship remains central to public external borrowing both before and after the crisis. Before 1997 right-leaning parties used official creditors despite strong growth and investment-grade credit ratings. From 1998-2000 conservative Democrats continued prioritizing official credit even though a large 1998 bond had benchmarked for a market return, credit ratings improved in 1999 and 2000, and political pressure to avoid official creditors had mounted. Thailand did not emphasize private finance until left- leaning populist party Thai Rak Thai won the 2001 elections by campaigning against
Democrats’ tight fiscal policy and relationship with official creditors. From that point onward, official credit was only emphasized after military coups brought the conservative
Democrats back to government.
Notably, Thailand responded to the AFC by developing its domestic bond market.
The effort was successful, eventually making the country an “outlier” among MICs due
1 Among a vast literature, see Radelet and Sachs 1998; Fischer 1998; Suchitra 1998; Wade 1998; Nabi and Shivakumar 2001; MacIntyre 2001; Warr 2005b; Leightner 2007. 2 Nabi and Shivakumar 2001, 75 point out that ‘on the eve of the crisis, Thailand had relatively low public debt, both external and internal.’
120 to unusually deep domestic markets.3 Yet partisanship continued to shape the financing options used when Thailand did look outside for finance. Indeed, Thai external borrowing from 1990-2015 shows the partisanship effect is still there even if a MIC has deep domestic markets.
As in previous chapters, national fiscal and debt laws are outlined to establish the legal framework within which budgets are set and borrowing takes place. The borrowing process is then traced. The final section sets the political context before tracing how government partisanship shaped external borrowing policy in Thailand from 1990-2015.
Chart 1: Thailand Annual Commitments by Governing Party Partisanship (% Official) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Democrats (Right) TRT, PPP & Pheu Thai (Center-Left)
Data from World Bank Development Indicators, calculations by author. Accessed November 8, 20174
3 Quote from Interview 1, whose confidential documents show that by 2015, external debt accounted for only 6.2% of outstanding government debt. Interview 18 notes swapping official creditor loans remained cheaper than domestic debt until 2012 or 2013. The late 2000s are noted in numerous PDMO documents and interviews as a tipping point for domestic market depth. Interview 21 noted a 2008 amendment to the Public Debt Management Law (outlined below) allowed government to issue domestic bonds without oversight and even when in surplus (see also Wichit 2008). Regardless, at some point between 2008-2013, domestic debt became the focus of Thailand’s finance ministry. But it did not negate the partisan effect on external borrowing choices. 4 Beck et al. 2001 label all parties in Thailand after 2001 as non-right, reflecting the general populism and looser fiscal policy of all parties after TRT. In the quantitative section they are coded accordingly. A level
121 Fiscal and Debt Laws
It is useful to begin by noting Thailand’s technocratic history. Until the 1990s, military rule allowed economic ministries to operate with little political interference. The technocrats used this insulation to implement orthodox liberal economic policies so successfully that a mid-1990s World Bank book called the country a “macroeconomic miracle.”5 But technocrats lost this autonomy once military rule ceased between 1988-
1992. Policy-making processes became politicized as power was transferred “to elected politicians rather than technocrats or generals.”6 This is a useful starting point because decades of technocratic control explain why formal legal frameworks for budgets and borrowing are minimal in Thailand.
Indeed, national fiscal laws are non-existent. Under military rule, the Bureau of the Budget (BoB) internally “set ceilings for budget expenditures in line with expected revenue” and legal limits never emerged after military rule.7 Democratization did not bring about laws that formally constrain spending. Even during and after the AFC in the late 1990s, upward pressure on budgets has continued without formal legal constraint.8
Like other countries in this study, Thai debt regulations are comprised of flexible laws and benchmarks. Most debt limits are set as a share of expenditures, which means debt limits are products of annual spending levels rather than reliable constraints on that
of detail is added here to highlight how the only times Thailand was likely to return to official creditors in a substantial way after the TRT years is when Democrats are in power. 5 The miracle label is from Warr and Bhanupong 1996. See also Stifel 1976; Pasuk and Baker 1999, 195– 198; Hewison 2002, 1–4. 6 Quote from Baker and Pasuk 2014, 246–247. On the retreat of the economic technocracy and effects in the AFC context, see Apichat 2002; Suchitra 1998, 161–164; MacIntyre 2001, 96–101; Baker and Pasuk 2014, 255; Pasuk and Baker 1999, 201. See fn. 1 noting the wider variety of literature on AFC causes and effects. 7 Jansen and Choedchai 2009, 329; Root 1998, 64. 8 MacIntyre 2001, 97. Interview 20.
122 spending.9 In particular, borrowing cannot fund more than 15-20% of central government expenditures and SOE debt cannot amount to more than 20% of expenditures.10 But upward pressure on expenditure is not required to coincide with growth or higher revenue, which means increasing expenditure quite easily leads to increasing total debt.11
Moreover, ad hoc laws are used if more credit is needed, with one former official emphasizing all parties “too often” use emergency tools to increase spending.12 While total outstanding debt is capped at 60% of GDP, this is a high limit that has not constrained borrowing in practice.13
A Public Debt Management Act was passed in 2005, but it largely clarified and formalized debt operations that had been habitual and unclear.14 It did not create new or more rigid debt regulations. Some say the populist party TRT passed this law in 2005 to gain support from the business class and investors in the lead-up to an election, while others say it helped create confidence in rapidly growing domestic markets.15 Regardless, the Act did not substantively change debt limits or laws in Thailand.16 Flexible laws for both the central government and SOEs persisted even after this act.
Finally, reflecting Thailand’s emphasis on domestic bond markets by the late
2000s, the Ministry of Finance sets an internal benchmark that no more than 20% of government debt should be external. This was set in 2007 before the domestic bond
9 Interview 20. 10 Bhanupong 2015, 117. Also see the 2005 Public Debt Management Act. SOE debt includes guarantees. 11 International Monetary Fund 2012, fig. 2; Bhanupong 2015, 115–116 show effects of this. 12 Interview 30. Also Interviews 20 and 26. 13 Bhanupong 2015, 117. Interviews 17 and 21 also note there is a tighter internal target of 50% at finance ministry. 14 Section 3 of the Act lists the variety of debt laws and finance ministry roles codified in piecemeal laws going as far back as 1944. 15 Interview 30 on political aim of passing law and Interview 35 on domestic market effect. 16 Interviews 18, 20, 21, 30, and 35 say practices did not change.
123 market fully developed, and in practice the government has remained well under this level since.17 The most important point here is that no law or benchmark explicitly constrains choice of creditor when the government does turn outside for finance.
Borrowing Process
Before 1997 external borrowing was controlled by multiple entities, but after the crisis a single Public Debt Management Office (PDMO) became responsible for debt management and borrowing.18 The PDMO works on financing once budget items are finalized, meaning the PDMO simply “has to [fund] what government wants.”19 This is why, although highly regarded technically,20 the PDMO’s work is set by partisan budget politics that determine financing requirements.
The PDMO produces an annual borrowing plan each September. The plan is reviewed by a Debt Management Committee of economic ministers and approved by cabinet before inclusion in the budget submitted to the Prime Minister and MPs.21
Crucially, ease of approval varies by governing party. In particular, the populist TRT party and its descendants politicized multilateral credit options and worked to keep the
PDMO from using them. Lender and domestic interviewees agree TRT made the
PDMO’s work “a whole new game.”22 Political interference on borrowing decisions is detailed here after reviewing PDMO guidelines and formal borrowing criteria.
17 Interview 1. The only other benchmark covering foreign debt relates to currency composition when using private market options (priority is on JPY and USD). Other benchmarks relate to domestic debt. 18 Interviews 26 and 35 said they mainly helped to consolidate external and domestic debt management into one unit. 19 Quote from Interview 26. Interviews 11, 16, 17, 18, 19, 20, 21, 24, and 35 corroborated. 20 This view is shared across official and private interviewees, both previous and current. 21 Interviews 1, 20, 26. 22 Quote from Interview 20, corroborated by Interviews 1, 2, 8, 9, 11, 16, 17, 18, 19, 24, 30.
124 PDMO Options and Criteria
The PDMO “compares costs” when borrowing.23 Since the AFC this has meant maximizing domestic finance to minimize foreign exposure.24 While external borrowing has “gradually” decreased in absolute terms because of this, the PDMO is still interested in external finance “for emergenc[ies] or for investment projects in which the lender offers preferential terms or technical knowledge.”25 To be sure, any external finance must be cheaper than domestic options.26 But despite deepening domestic markets, the PDMO still considers external options.27
When turning outside for finance, the PDMO faces the same tradeoff as other
MICs. As just noted, the PDMO sees value in official creditors’ good prices and technical assistance in projects. Line ministries will also include official credit in budget proposals if they see a price or technical benefit.28 While some suggest multilateral boards resist giving budget support to Thailand anyway,29 most lender and government interviewees emphasize Thailand values the technical benefits of official lenders’ project loans.30
Furthermore, while official lenders cannot lend large amounts in Thai Baht,31 the PDMO appreciates they are more open to restructuring than markets.32
23 Interview 26. 24 All interviewees corroborated this. 25 Quotes from Interviews 24 and 1, respectively. 26 Interviews 1, 2, 8, 9, 17, 18, 20, 26, 30, many of whom note the importance of including the cost of swaps. 27 See footnote 3 for timing of domestic market deepening. 28 Interviews 11, 20, 26. Interview 24 claimed Thai companies “can build a road with their eyes closed,” but SOEs and the PDMO clearly see some value add in official creditor project loans. 29 Interviews 1 and 24. 30 Interviews 8, 9, 11, 17, 18, 19, 20, 24. This is particularly true since domestic markets deepened substantially, making it easier and cheaper to get general financing on domestic markets. 31 Interviews 1, 2, 8, 9, 18, 24. 32 Although Interview 18 also noted a few instances in the 2000s and 2010s when official creditors tried to convince the PDMO not to repay debt early, even then the PDMO restructured or repaid early anyway.
125 More negatively in the context of official credit, they find World Bank, Asian
Development Bank, and Japanese loan negotiations can take 6-12 months.33 Foreign bond-issuance roadshows are a hassle compared to routinized domestic issuing, but official creditors remain “slower to use.”34 This is a particular problem in Thailand because the PDMO has had trouble completing loan agreements if and when new leaders come into power in the middle of negotiations.35 Slow and structured disbursements can also affect the ability to swap non-Baht debt, a visceral concern in Thailand given the memory of the currency-driven 1997 crisis.36
Most importantly, official conditions are politically controversial in Thailand and thus for the PDMO. They became a sensitive political issue during the Asian crisis and have remained so since. Even though conditions became relatively minimal and negotiable after the 1990s, environmental and transparency standards are a point of contention and concern about autonomy infringement by external actors is strong in
Thailand, stemming in large part from the perceived effects of IMF presence during and after the AFC.37 This general claim is detailed through the rest of the chapter, as it traces various parties’ borrowing preferences.
Political Intervention in PDMO Borrowing Decisions
Throughout the 1990s Thai public borrowing was relatively insulated from public scrutiny, with minimal executive influence and no legislative oversight.38 But after populist party TRT won the 2001 elections, borrowing became a “whole new game”
33 Interview 23. 34 Quote from Interview 26, corroborated by Interviews 17, 18, 19, 21, and 26. 35 Interviews 19 and 26. 36 Interviews 17 and 18. 37 Interview 16 on transparency and environmental points. All lender and domestic interviewees note political salience of autonomy among parties and the public in Thailand. 38 Interviews 18, 19, 20, 24, 26, 30.
126 where “political transaction costs” began to “constrain” PDMO borrowing decisions.39 In other words, borrowing decisions were “traditionally technical… but TRT changed that.”40 Specifically, TRT aimed to eliminate use of official creditors, a political position drawn from its campaign against Democrats’ close association with them.41
TRT interventions were both informal and formal. Informally, PDMO staff at all levels were forced out if they did not agree with TRT’s approach to external creditors or fiscal policy more generally.42 This allowed TRT to informally limit external borrowing to $1 billion USD.43 While those remaining at the PDMO were open to using this limit, there was further pressure not to use external financial sources at all,44 including from
TRT leader Thaksin Shinawatra who wanted to “personally manage and limit” PDMO use of external financial sources, particularly official creditors.45
One former multilateral official recalled Thaksin intruding on a PDMO meeting with their bank unannounced and ending the meeting despite PDMO interest in borrowing.46 Another interviewee said maintaining a relationship with Thailand under
TRT was “almost not worth it,” while another described the relationship of a different multilateral and Thailand as “broken” in those years.47 PDMO interviewees recall a new level of interest in borrowing among MPs and cabinet members, many of whom were
TRT and thus interested in scrutinizing use of official credit. Justifying official credit
39 “Whole new game” quoted from Interview 20. Interviews 8 and 11 noted “political transaction costs,” while all corroborated such a view. “Constrain” quote from Interview 24. 40 Interview 19. 41 All interviewees noted this aim. For literature on TRT use of conditionality criticism to gain support, see Choi 2005; Hewison 2005; Baker and Pasuk 2014, 263–265. 42 Interviews 11, 16, 17, 18, 19, 20, and 24. 43 Interview 26. 44 Interviews 20 and 26. 45 Interview 30. 46 Interview 19. 47 Interviews 24 and 11, respectively.
127 came to involve “high political transaction costs” insofar as resisting TRT preferences meant no longer working in government.48
These efforts to minimize use of multilaterals were formalized in Section 190 of the 2007 Constitution, which gave multilateral loans the status of treaties.49 While this did not include bilaterals like Japan’s JICA, this meant multilateral loans now went through a different approval process than other forms of finance. In particular, the PDMO had to propose multilateral loans to Parliamentary committees in hearings broadcast on public television.50 Interestingly, the Constitution was passed after a military coup removed TRT from office, but public scrutiny of and concern about official creditors had become so significant that the PDMO encouraged the coup government to include the clause as a way to appease the public.51
The PDMO now “[had] to explain to the public” why multilaterals were being used, which was “difficult” because MPs would “express a lot of emotion” and “invent… claims about sovereignty and autonomy even if [they were] not true.”52 MPs used the hearings as an “opportunity to make noise about protecting people” and show that they resist “being run by foreigners.”53 In practice, multilateral price and technical benefits were overwhelmed by the “hassle” of this “exhausting” overtly political process.54
These procedural changes remained in effect after TRT. This means that regardless of PDMO openness to official prices, conditions, and technical support, the governing party must be open to using official creditors. Over time, many parties have
48 Interviews 17, 18, 20, 21, 23, 26. 49 All interviewees noted this change, which is in Section 190 of the constitution (Interview 26). 50 Interviews 11, 20, 26. 51 Interview 23. 52 Interview 26. 53 Interviews 26 and 24, respectively. 54 Interviews 11 and 26, respectively.
128 become overtly involved with borrowing to keep the PDMO from using official credit they would use otherwise.
SOEs
Before continuing it is important to note that, as detailed below, SOEs came to use external finance more than central government during this period.55 This makes SOEs an important component of Thai external debt. However, SOEs are part of normal state budget and finance processes in Thailand.56 When borrowing, there is a legal 20%-of- expenditure limit on SOE guarantees or on-lending.57 Within this cap the PDMO can decide whether or not to explicitly guarantee foreign SOE debt obligations, though they tend to do so.58
SOEs have used both official and private external finance. For example, Thai
Airways has long used external markets and the PDMO has simply rolled most of this debt over.59 At times the PDMO will use an official loan to shift Thai Airways’ debt portfolio, as it did in the 2010s to fund new airplanes (more on this in the final section).60
This simply highlights the PDMO has substantial control over SOE borrowing and debt, and explicit or implicit guarantees do not affect the national debt position to the extent that they do in South Africa.
55 For example, by December 2015, SOEs accounted for THB267 billion in outstanding external debt while the central government accounted for THB81 billion in external debt. Most central government debt came to be domestic (THB4 trillion by December 2015). See Thailand PDMO 2018. 56 Kriangchai 2009, 52; Warr and Bhanupong 1996, 93. Also Interviews 1, 18, 20, 26. 57 Interview 1. 58 International Monetary Fund 2004, sec. 19 says 85% of SOE debt was guaranteed in the post-AFC years and Interview 18 says if anything this level has been maintained or increased since the early 2000s. 59 Interview 1. 60 Interviews 1 and 18.
129 Thai Politics & Borrowing from 1990-2015
The first section of this chapter showed that, like other MICs in this study, Thai fiscal and debt laws do not constrain choice of external creditors. The second section showed how, while Thailand has come to have unusually deep financial markets, the
PDMO still considers external financing options and faces the same tradeoff as MICs when doing so. It was also shown that political intervention in PDMO external borrowing decisions is overt and, at least with respect to multilateral loans, formalized in law. This means that when the PDMO turns abroad for finance, governing party preferences are necessarily central to final external borrowing choices.
To illustrate this, this section first summarizes the partisan political coalitions that shape Thai politics. It then traces how PDMO external borrowing choices significantly depended on which of these parties was in power from 1990-2015.
Thai Politics
The Thai political system is relatively tumultuous. While democratization away from military rule was the underlying trend in the second half of the 20th century,61 recurrent military coups, periodic intervention by the King, and intermittent re-writing of the constitution meant “Thailand’s widely anticipated democratic consolidation [was repeatedly] confounded” in the period under study here,62 as elected parties were continuously removed in military or judicial coups before new elections were eventually scheduled.63
61 Connors 2007; Baker and Pasuk 2014, chap. 7. 62 Hewison 2010a, 122. 63 Hewison 2010a; Baker and Pasuk 2014, chaps 8–9; Kanchoochat and Hewison 2016.
130 While the system itself is unstable, Thai politics is shaped by contestation between complex but clearly delineated sectoral and class-based coalitions. On one hand, the military-technocrat-monarchy nexus of the 20th century underpins a large conservative coalition interested in “maintaining ruling-class control of the state.”64
Externally-oriented business, which had benefitted from technocrats’ orthodox liberal economic policies during military rule (and largely maintained its wealth through the
AFC), also forms a core component of this group that is interested in maintaining technocratic influence over policy and the state.65
The urban middle class joined this conservative coalition in the 2000s as an anti- populist response to “the creation of a ‘welfare state,’ imagining indolent villagers getting fat on state handouts” under populist governments.66 The King came to be the reference point for this broad coalition interested in conservative and orderly management of the
Thai political-economy. The infamous “yellow shirts” in Thailand symbolize support for the coalition by wearing the King’s color, while organizationally they are represented by the Democrat party.67
A somewhat predictable anti-elite coalition emerged in contrast. Rural residents, the poor, and labor lie at the core of this group.68 Populist leaders appeal to this constituency with “a nationalist message and range of welfare policies,” including nearly- free public healthcare, credit programs for villages, and price-fixing schemes for rice farmers.69 Labor power had been minimized under military and technocratic rule, with
64 Hewison 2010a, 123. 65 Jayasuriya and Hewison 2004; Pasuk 2016. 66 Hewison 2010a, 125. 67 Baker and Pasuk 2014, 254. 68 Kitirianglarp and Hewison 2009. 69 Hewison 2010a, 124; Jarvis 2002; Pasuk and Baker 2008; Laiprakobsup 2014.
131 the 1991 military junta government going so far as to ban unions. Labor activism increased in the 1990s and 2000s and ostensibly found formal representation alongside rural people and the poor in this populist coalition.70 Even though labor did not gain significant victories, most laborers benefit from the rural and poor programs that Thai populists pursue, keeping labor’s support within this coalition.71
In addition, domestic business, particularly damaged by the crisis and threatened by proposals to increase foreign ownership in many sectors during the recovery, aligned with these pro-state interests.72 Indeed, the AFC is a key turning point for coherence and voice of this coalition in Thailand, manifest most clearly in the post-crisis emergence and success of the populist TRT party.73 After a coup removed TRT from government in
2006, this coalition was represented by a party with a different name, Pheu Thai, but the party is an obvious descendent of TRT and seeks to connect directly to the same rural, poor, big domestic business coalition.74 Since then, in contrast to the royalist yellow shirts, the “red shirts” symbolize this relatively left-leaning populist coalition.75
From 1990-2015, control of government oscillated between parties representing these two complex but distinct coalitions. The remainder of this chapter traces public external borrowing in Thailand in four sections: pre-AFC (mostly Democrats), from the
AFC-2001 (Democrats), from 2002-2006 (TRT), and from 2007-2015 (various coups and elected governments). Each section details economic context, government partisanship, partisan economic policies, and subsequent borrowing outcomes. The aim is to show that
70 Baker and Pasuk 2014, 209–212. 71 Brown and Hewison 2005. 72 Ibid.; Kitirianglarp and Hewison 2009, 454–455. 73 Brown and Hewison 2005; Kitirianglarp and Hewison 2009; Hewison 2010b. 74 Baker and Pasuk 2014, 279. 75 Ibid., 273–278.
132 government partisanship affects external borrowing alongside national or global economic conditions, PDMO procedural changes, and deepening domestic markets.
Pre-AFC (1990-1996)
Thailand experienced an economic boom from the late 1980s through 1996.76
High growth and “good” economic policies led to investment-grade credit ratings throughout the period (see Table 1). The private sector used this market access to take on high levels of foreign direct and portfolio investment throughout the boom.77 However, government continued to prioritize official credit despite market access (see Chart 1).
The balanced borrowing strategy is explained by the conservatism of Democrats, the dominant party in these years.78 Orthodox macroeconomic management persisted across the economy, especially in fiscal policy. Chart 2 shows consistent large surpluses, which ensured no serious financing requirements arose in the public sector. Meanwhile, borrowing decisions remained technocratic as “[the party] listened to bureaucrats” about borrowing in this period.79
Debt management bureaucrats used this space to “[borrow] from [official] sources such as the World Bank, because these funds would be closely monitored and supervised.”80 In the context of democratization, official credit was a tool for technocrats to manage spending increases they felt the public sector did not have the capacity to use effectively.81 If private bonds were unusually cheap at a certain time then the bureaucrats
76 Warr 2005a, 3–14. 77 Ibid., 3–13. 78 Baker and Pasuk 2014, 253–255; King 1996. 79 Quote from Interview 19. Interviews 18, 19, 20, 24, 26, 30. 80 Warr and Bhanupong 1996, 94. Also Interviews 19, 20, 24. 81 Interviews 11, 18, 19, 20, 26, and 30 discussed how civil servants were (and remain) skeptical about the lack of public sector capacity to use borrowed money efficiently and effectively.
133 issued, as they did once in the United States and once in Japan in this period.82
Commercial banks were also used if they were cheaper, though not nearly as often as by the Thai private sector.83 In short, the investment-grade Thai government could have followed the private strategy of the private sector, but Democratic economic policies allowed the technocrats to continue using official credit in these years.84
The AFC and Post-AFC Democrats (1997-2001)
But in 1997 the trauma of the AFC led to significant and long-lasting economic and political effects. Many point to floating the Thai Baht on July 2, 1997 as the beginning of the crisis, but the build-up extends into 1996.85 Although Democrats briefly lost control of the governing coalition after the 1996 elections, the trauma of the crisis brought the Democrats back to government in November 1997 without elections because the coalition “wanted the Democrats and their technocrat team to return and manage the economy.”86
Before the Democrats took office again the IMF had arranged a $17.2 billion
USD bailout package that aggregated a variety of multilateral and bilateral funds. Bailout conditions included allowing insolvent banks to fail, fiscal surpluses, privatization, a
VAT, increasing reserves, and orthodox changes in monetary policy beyond floating the
Baht.87 While “Democrats lobbied the IMF to adjust the details….[in] general, the
82 Interview 18. 83 Interview 18. 84 Also important to keep in mind is that the domestic market did not develop until after the crisis, so external credit was the primary financing option in the 1990s. 85 For a simple timeline, see Nabi and Shivakumar 2001, chap. 3. Among many exposés, see Warr 2005a, 14–32; MacIntyre 2001, 96–101. 86 Baker and Pasuk 2014, 260. 87 Nabi and Shivakumar 2001, chaps 3–4; International Monetary Fund 1997a; International Monetary Fund 1997b.
134 Democrats cooperated with the IMF” once back in government.88 Indeed, the second IMF
Letter of Intent in November 1997 began by stating “[the] new government… has reconfirmed its full commitment to the economic program specified in the [first Letter of
Intent] of August 14, 1997.”89 This emergency package is why most external finance in
1997 was from official sources, despite coming at the end of the fiscal year (see Chart 1).
The crisis continued through 1998, which makes it important that Chart 1 also shows a return to markets in 1998. This reflects bond issuances via SOEs on foreign markets to “immediately increase reserves and creditworthiness.”90 For example, a $300 million US bond was issued in 1998 by the country’s utility SOE. The loan was partially guaranteed by the World Bank’s IFC arm, which brought the credit rating to “A3/A-, significantly above” Thailand’s crisis-era junk rating.91 Other external borrowing in 1998 continued to be official credit associated with the IMF-led bailout.92
Post-crisis recovery began by 1999 and the Democrats remained in government until 2001.93 In those years, the only other uses of private external credit were for
SOEs—the Democrats did not issue a foreign bond for the central government budget, strictly using official creditors.94 This signals some degree of access to markets, but use of them only through SOEs, not by the central government itself. In other words, any use of private external finance in Chart 1 before 2001 is SOE debt.
88 Baker and Pasuk 2014, 260. 89 International Monetary Fund 1997b. 90 Interview 18. 91 World Bank 1998, 2. See Table 1 to compare to Thai ratings. 92 It is useful to note this is also the year the government began issuing large amounts of domestic bonds. This was done to fiscalize THB1.4 trillion of non-performing loans accumulated by the Financial Institutions Development Fund (FIDF), the story of which is summarized by Nabi and Shivakumar 2001, 30–31; Bank of Thailand 2002. See also International Monetary Fund 1998b, secs 7, 18. 93 Nabi and Shivakumar 2001, chap. 8; Warr 2005a, 13 show how the post-crisis period began in 1999. 94 Interviews 1, 8, 9, 16, 17, 18, 20, 24, 26, and 35. See also International Monetary Fund 1998a, sec. 19, which shows the IMF agreed to SOE use of foreign finance, emphasizing but not limited to official credit.
135 Democrat avoidance of markets may seem inevitable because the crisis had just ended. But their commitment to fiscal tightness and official creditors was not pre- determined. The party committed to such a borrowing strategy “despite gradual erosion of support [for it over these] three years.”95 It would have been popular and possible to pursue fiscal expansion rather than conditions requiring austerity. It also would have been popular and possible, if expensive, to resist conditionality by using private finance like
Thai SOEs. But the Democrats did neither, which, as discussed later, explains the emergence of left-leaning populist political opposition in these years and their success in the 2001 election.
First, looser fiscal policy was possible and promoted by the IMF and World Bank.
The IMF emphasized counter-cyclical spending by 199896 and, while Democrats pursued a stimulus in 1999, Bank staff wrote “proposals for an even larger fiscal stimulus… were rejected” and “the impact would have been larger if it had been implemented earlier.”97
While this may be “revisionist” Bank history because calls for social safety nets were not as clear as claimed,98 the main point is that the Democrats pursued either as much or less fiscal expansion and social spending than the IFIs prescribed. In fact, Chart 2 shows the
Democrats ran a surplus in 2000 despite upcoming elections.
Second, whether prudent or not, the Democrats could have used private external resources from 1999-2001. SOE use suggests some level of foreign market access as early as 1998, and Thailand was upgraded to investment-grade by Fitch in 1999 and
95 Baker and Pasuk 2014, 260. Interviews 8, 9, 11, 16, 17, 18, 20, 21, 30. 96 Ibid., 258; Hewison 2002, 12; International Monetary Fund 1998a. 97 Nabi and Shivakumar 2001, 43, 59, 67–68 the last two pages of which note a democrat-sponsored stimulus was proposed at the end of 2000 (pg. 68), but this would not have been passed and implemented in time for the 2001 budget. 98 Hewison 2002.
136 Moody’s in 2000.99 But the Democrats did not use this market access in 1999 or 2000.
While funding for the Democrat’s relatively small stimulus efforts “had to be foreign- financed,” this was done through official creditors.100
Again, the issue is not whether using private external resources after 1998 would have been wise or not. The point is that the Democrats chose to avoid it. This is important because the Democrats faced political repercussions for their commitment to official finance. Views of the Democrats’ external borrowing strategy range from admiration (for maintaining a long-term perspective) to criticism (for shortsightedness).
Some suggest that Democrats simply found markets too expensive at the time.101
Emphasis on private finance costs rather than benefits leads some to say Democrats knew official credit “did not help politically but put the country on a good path.”102 Others say the party was not so altruistic, knew the policies would be criticized, and tried to say from the outset that the policies were dictated by the IMF but “had problems explaining” this.103 Still others suggest Democrats actually “did not understand” there was a political backlash to using official creditors and associated policies.104
Regardless of perspective, the fact is that the Democrats’ preferred tight fiscal policy and official creditors from after the AFC until 2001. It may be true that despite the political implications, future spending levels and welfare state expansion in Thailand were only possible because the Democrats’ post-crisis policy choices led to stability in
99 See Table 1. 100 Interviews 1, 8, 9, 16, 17, 18, 20, 24, 26, and 35. Nabi and Shivakumar 2001, 55. 101 Interview 21. 102 Quote from Interview 17. Interviews 8, 9, 11, 16, 19, 21, 24 took a similar perspective. 103 Interview 35 on trying to communicate. Interview 21 for quote. Interview 8 agrees that Democrats were poor communicators. 104 Interview 30.
137 the long run.105 Yet they remain policy choices. Fiscal and borrowing policy could have been otherwise after the AFC. If the Democrats were not committed to macroeconomic sustainability and aligned with official creditor policy prescriptions generally, or if they were only concerned with political ramifications, they could have spent more and borrowed differently. But they did not.
Thai Rak Thai (2001-2006)
Although Democrats gave “markets, the international financial institutions, and bilateral partners confidence regarding Thailand’s commitment and its ability to stay the course” in 1997,106 their policies created space for a relatively left-leaning populist party to emerge. Thai Rak Thai (TRT) appealed to the “nationalistic reaction to the crisis… embrac[ing] the theme of self-strengthening to manage globalization.”107 Domestic business and the poor, the largest groups hurt by Democrats’ commitment to IFI- sponsored polices, created an anti-orthodoxy, explicitly anti-official creditor coalition.
Business sought to combat foreign ownership and exposure while the poor sought welfare expansion. The Democrats lost the January 2001 elections in large part “because of their association with IMF-mandated policies” during and after the crisis.108
TRT set out to minimize technocratic influence, making “reappointments in the senior bureaucracy and state enterprises to intimidate officialdom into submissiveness.”109 This included the PDMO, as anyone who “expressed concern [about
105 Interviews 8, 18, 21, 24. 106 Nabi and Shivakumar 2001, 37. 107 Baker and Pasuk 2014, 262–263; Hewison 2010b, 122. 108 Baker and Pasuk 2014, 262–263; Warr 2005a, 40–43; Dempsey 2000, 392–393; Hewison 2002; Hewison 2004, 508–512, 515; Hewison 2005; Jayasuriya and Hewison 2004, 572, 582–583; Hewison 2010b, 121; Choi 2005; Ammar 2011, 75. 109 Baker and Pasuk 2014, 263.
138 TRT] was removed or resigned.”110 TRT borrowing preferences thus immediately shaped
PDMO policy, despite being relatively insulated from politics under the Democrats.
Fiscally TRT emphasized social spending, reflected the interests of its poor constituents, and was thus farther left than anything Thailand had seen before.111 Key programs were block grants to villages and universal health care.112 While Chart 2 shows
TRT ran small surpluses after a large initial deficit in 2002, this was possible because the
Democrats’ policies left behind high levels of foreign exchange and privatization proceeds for TRT to draw on.113 Furthermore, some expenses were financed off-budget via state banks that were caught in a new “political envelope [of] government control” under TRT leader Thaksin Shinawatra.114 Finally, Thaksin did not start new infrastructure programs.115 This meant TRT “needed less financing” to increase social expenditure, because money was simply reallocated to social expenditures without overloading the budget.116
Fiscal policy was not the only area where TRT was explicitly further left than the
Democrats. For example, while granting a three-year moratorium on farmers’ debt,
Thaksin mandated more credit be available than the banks were willing to provide
110 Interview 20. Also Interviews 8, 9, 11, 16, 17, 18, 19, 24, 26, 30. 111 Hewison 2004; Hewison 2010b. Interviews 8, 9, 11, 19, 20, 24. 112 Hewison 2004, 516; Ammar 2011, 75–77; Baker and Pasuk 2014, 263. 113 Ammar 2011, 76–77. This reflects the long-run benefits of Democrat’s policies noted by Interviews 8, 18, 21, 24. 114 Ibid.; The Nation 2003. 115 Webster and Patharaporn 2004 notes ‘no new major infrastructure projects [were] proposed, planned and designed between 1997 and 2003. Accordingly, there [were] very few major infrastructure projects in the pipeline’ in the latter half of Thaksin’s term. Interview 24 noted the same thing, saying Thaksin simply finished pre-existing infrastructure spending plans. 116 Interview 24.
139 independently.117 Credit manipulations in favor of poor constituents are plainly unorthodox, showing TRT followed through on its campaign rhetoric in many key areas.
As in other MICs, these left-leaning economic policies shaped borrowing. TRT and Thaksin shifted borrowing away from official creditors. As one former PDMO employee noted, TRT wanted to change spending rapidly and the “PDMO needed private money to do that.”118 Chart 1 shows most external borrowing for the budget or SOEs was from private sources under TRT in the first half of the 2000s.
To be sure, TRT’s first years included some official credit. These reflect official loans begun under the Democrats but completed by the PDMO under TRT, such as a
$400m World Bank budget support loan that was able to support TRT’s shift in spending priorities.119 It is also true that upgrades from all three major ratings agencies in 2003 made private finance more appealing to the PDMO than it had been in 2001 and 2002.
However, Thailand was investment-grade at two of the three agencies since 1999 and
2000, so rating upgrades do not entirely explain a change in borrowing or the avoidance of official credit afterward. Borrowing primarily changed because of TRT’s left-leaning partisanship, which took effect most clearly after lingering official loans from the
Democrats were finalized.
TRT had strong effects on both lender and PDMO staffs. For lenders, the IMF experience signaled what was to come. After declaring “the IMF had harmed Thailand,”
117 Ammar 2011, 75–77; Wichit 2003; The IMF even noted this in its program conclusion, warning ‘against the resumption of state-directed lending in recapitalized banks,’ in International Monetary Fund 2002b. This is related to or part of the off-budget spending tactics noted above. 118 Quote from Interview 20. To be sure, while in other countries left leaning governments pursued external markets, TRT used the growing Thai domestic market to quickly obtain and cover the financing needs not met by reserves, revenues, and other tactics noted above. 119 Interviews 16 and 19. See World Bank 2002.
140 TRT pledged to repay the IMF early.120 This was achieved in 2003, which Thaksin
“touted… as one of his proudest moments in office.”121 Interviewees recalled Thaksin appearing “on television [after the repayment] saying Thailand was free.”122 This political stance affected all official lenders, as concerns about economic and political autonomy meant official creditors took on an inescapable “stigma” among Thai politicians and the public.123
The World Bank also struggled to lend to Thailand after the lingering Democrat loans were finalized. The Bank tried positioning itself as accommodating to the need for
Thai autonomy, for example changing its rhetoric when negotiating with Thailand to propose a “knowledge partnership” rather than a lending relationship.124 But the Bank-
Thai relationship was limited to a “non-lending” service-for-fees relationship under
TRT.125 Using a relatively small amount of Bank funds in a multi-lender roads project in
2003 was “almost a favor” for the Bank by the PDMO.126
Similarly, the Asian Development Bank was restricted to advisory assistance with no lending in the TRT years, symbolized in Thaksin delaying the opening of the ADB’s
Bangkok offices for many years until 2005.127 Japan’s bilateral lending arm JICA found that by 2006 “[d]ue to Thailand’s policy of restricting overseas borrowing… [i]n a practical sense, it can be said that bilateral cooperation through large-scale yen loans is to
120 Hewison 2004, 511; Kazmin 2002. 121 Kazmin 2006. 122 Quote from Interview 21. Similar tactics recalled by Interviews 8, 18, 19, 24, 30. 123 Stigma from interview 11. All lender and borrower interviewees emphasize aversion to conditions and emphasize importance of autonomy. 124 Interview 18. 125 World Bank 2006, 9, fn 5 on small amounts and ‘non-lending’ label for post-2002 relationship. See also World Bank 2003, sec. i. 126 Interview 18. For reference, see World Bank 2010a, sec. 2. 127 Interviews 17, 21, and 24. Asian Development Bank 2007, secs 1, 9 also notes the ‘absence of an active borrowing program’ and a TA-based relationship in this period.
141 be terminated.”128 China was (and would remain) unused because the PDMO found it more expensive, required excessive collateral commitments, and was tied to Chinese companies and labor.129
PDMO use of official financing options was thus explicitly constrained by TRT preferences. While the financing requirements were small, the rapid shift in priorities made private financing appealing.130 More directly, as noted previously, TRT informally limited external borrowing to $1 billion USD but Thaksin would “personally manage and limit” any attempt to the PDMO to use official creditors.131 Even when price and technical benefits of official creditors were valued by the PDMO, the “political transaction costs” of using them were too high.132 TRT explicitly wanted to avoid official credit, and Chart 1 shows the party largely succeeded in this regard.
The early 2000s shift away from official credit is primarily explained by TRT preferences. TRT economic policy diverged significantly from official creditors’ traditional prescriptions. Concern for autonomy led to significant intervention by TRT in the borrowing process that sought to ensure official creditors were avoided as much as possible. It was not credit ratings or improvements in fundamentals that explain the timing of shifts in external borrowing, but partisan politics.
Post-TRT (2006-2015)
In September 2006, a year after TRT won a second election, the military took government by coup “to adjust the balance of political power by neutralizing Thaksin,
128 Government of Japan 2006, sec. 2. 129 Interviews 19, 20, 24, 30. 130 Interview 20. 131 Interviews 19, 26, 30. 132 Interviews 11 and 26.
142 reducing the role of elected politicians, and returning power to the bureaucracy”.133 This began a period of frequent government change between Thaksin allies and a military- bureaucrat-middle class coalition represented by the Democrats. TRT-related parties won elections in 2007 and 2011 and Democrats took charge following their military or judicial removals in 2008 and 2014. This means Thailand had Democrat-led governments from mid 2006-2007, from 2009-mid 2011, and in 2015.134 Otherwise, TRT descendants were in government.
While government changes did not yield substantial changes to fiscal policy, they did affect external borrowing. On the fiscal side, TRT had set new expectations about the welfare state and “governments have [since] viewed welfare as essential for winning political support.”135 Although Democrats remained conservative,136 some level of state- provided welfare was now part of all party platforms.137 This explains why Chart 2 shows expenditures have trended upward since TRT regardless of the specific party in power.
Borrowing, however, did change by government. Democrats used official credit and TRT descendants did not. While national and global economic conditions help explain when the PDMO borrowed externally rather than issue domestically,138 use of official creditors when turning outside depended on Democrats being in government.
133 Baker and Pasuk 2014, 271. 134 Ibid., chap. 9; Hewison 2010b; Kitti 2015; Kitti 2016. 135 Hewison 2010b, 130. Interviews 20 and 26. 136 Hewison 2014, 853–855. 137 For a practical example surrounding the 2006-2007 coup government coalition, see Kitirianglarp and Hewison 2009, 467–468. It is also notable that Beck et al. 2001 label all Thai governments as ‘left’ since TRT. 138 The substantial development of domestic markets by and through this time minimized the amount needed from external sources. Interview 1 showed that the size of the domestic bond market went from 12% to 72% of GDP from 1997-2015.
143 This remained the case despite investors, banks, and ratings agencies encouraging foreign issuing, signaling extensive market access.139
Indeed, “borrowing preferences [came to] depend on ministers” as politics became tumultuous.140 This is particularly true since, as explained previously, the 2007
Constitution forced official credit to go through a more overtly political approval process than other forms of borrowing, as discussed previously. In such a public context, senior government officials’ preferences shaped borrowing choices more than ever before. The
Democrats would put in economic leaders who “had better memories of IFIs,” had
“interest in official credit,” and would work through the process required to borrow from them.141 TRT-descendant parties and their ministers would never do this.
Accordingly, Chart 1 shows official creditor use spiked in 2007, 2009, and 2015, the first years of the three Democrat governments in this period. In 2007, the coup led to some nerves in domestic markets which made 2007 a “bad year… but there was never a serious liquidity problem.”142 Despite persistent liquidity, the Democrats borrowed from
Japan although Japan had considered lending to Thailand “terminated” under TRT.143
Also, developing a formal partnership with the ADB where one had not previously existed symbolized the shift in borrowing preferences under Democrats.144
Again under the Democrats in 2009 and 2010, the PDMO went to the World Bank and ADB for budget support. These loans were not necessary to fund the budget but
139 Interviews 20, 26. Interview 18 noted credit ratings are good but could be higher if Thailand issued more abroad. 140 See for example, Lefevre 2012. 141 Interviews 17, 11, and 16, respectively. Interviews 8, 9, 19, 20, 21, 24, 26, and 30 agree Democrat ministers are more open to official creditors. For an example of how tightly ministers reflected the persistent Thaksin/Democrat divide in this period, see ibid. 142 Quote from Interview 20. Interview 18 corroborated. 143 JICA 2008; Ministry of Foreign Affairs of Japan 2009; Government of Japan 2006, sec. 2. 144 Asian Development Bank 2007; Asian Development Bank 2008, 72.
144 Democrat ministers who had experience with the banks wanted the funds.145 Even Bank staff was surprised at interest in traditional loans rather than technical assistance.146 The loans were taken on partly because “while Thailand has good access to financial markets, borrowing from [official creditors] will help Thailand access longer term maturity financing,”147 partly to enhance the relationships with both creditors, and partly to provide a cushion for any lingering effects of the 2008 global financial crisis.148 In essence, the Democrats had a different view of the price-autonomy tradeoff than their
TRT counterparts. They emphasized the price benefits official creditors provide.
The PDMO going to official creditors even though they did not need the money and had to endure relatively high transaction costs is strong evidence for the effect of partisanship on external borrowing. First, the money was only used after the Democrats left government.149 The Democrat ministers were interested in rebuilding relationships with official creditors after TRT had torn them down. Second, the PDMO did not use official credit under the TRT-related parties before or after this Democrat government. In other words, the Democrats are the key factor in explaining whether or not the PDMO will use official creditors.
It was not until the Democrats returned to power in 2015 following a 2014 coup that the PDMO again used official credit. This time it used the ADB for project loans.150
145 Interviews 11, 16, 17, 21, 24. 146 Interview 16. 147 World Bank 2010b. Interview 27 notes ADB has similar benefits. Interview 30 agrees and says Thais see the ADB and World Bank as largely offering the same prices and maturities. 148 Interviews 8, 9, 11, 16, 17, 18, 19, 20, 21, 24, 26. 149 Interviews 16 and 20. See the disbursements plot in Chart 2, showing high levels of disbursement in 2013 and 2014 despite no loans those years. The interviews noted the money sat at the Central Bank, undisbursed from the time of the commitment until 2013. 150 For an overview, see ‘ADB-Supported Projects and Programs’ and ‘Cofinancing’ sections in Asian Development Bank 2016.
145 The loans were again not necessary for any reason related to lack of market access. They provided some price and technical benefits while enhancing the relationship with the
ADB.151
Again, it is telling that the Democrats used official creditors after the TRT-related
Pheu Thai party had avoided them from 2011-2014. Under such TRT-descendant populist parties, resistance to official credit is so strong that a flood crisis in December 2011 did not lead to substantial official credit despite interest from official lenders to contribute.152
Although conditions were fewer in number and negotiable in these years, environmental safeguards and transparency conditions remain problematic for parties other than the
Democrats.153 Moreover, a major Pheu Thai scheme to manipulate rice prices in favor of constituents would have been difficult with official credit conditions.154
Conclusion
Thailand shows how strongly government partisanship affects MIC external borrowing. Before the AFC, conservative governments had significant market access but still emphasized official credit. After the AFC had passed, right-leaning Democrats continued to maintain orthodox policies and use official credit. They did this despite some level of market access, space for further fiscal expansion, and credit rating improvements after the crisis had passed. Moreover, they did this despite mounting political pressure to avoid official creditors.
151 Interviews 17, 18, 20, 21, 24, 26. 152 Interviews 8, 9, 19, 20, 26. 153 Interview 16. 154 Ammar 2011, 78; International Monetary Fund 2012, 12.
146 Borrowing did not change until the relatively left-leaning TRT explicitly moved
Thailand away from official creditors. To be sure, other factors are important. The Asian crisis required official credit in 1997 and 1998 and the growth of domestic resources gradually reduced the PDMO’s need to use external finance in absolute terms. But sole focus on global or domestic economic conditions cannot fully explain the composition of
Thailand’s external financing choices. The PDMO faced overtly different political constraints on borrowing depending on which party was in government in a given year.
147 Chapter 6 Thailand Graphs
Chart 2: Thailand Central Government Fiscal Balance and Expenditure Levels 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -10.0 Gross Operating Balance Expense
Data from IMF Government Finance Statistics Accessed November 8, 2017
148
Table 1: Thailand Sovereign Credit Ratings Year Fitch Moody's S&P 1989 / A2 A- 1990 / A2 A- 1991 / A2 A- 1992 / A2 A- 1993 / A2 A- 1994 / A2 A 1995 / A2 A 1996 / A2 A 1997 / Ba1 BBB 1998 BB+ Ba1 BBB- 1999 BBB- Ba1 BBB- 2000 BBB- Baa3 BBB- 2001 BBB- Baa3 BBB- 2002 BBB- Baa3 BBB- 2003 BBB Baa1 BBB 2004 BBB Baa1 BBB+ 2005 BBB+ Baa1 BBB+ 2006 BBB+ Baa1 BBB+ 2007 BBB+ Baa1 BBB+ 2008 BBB+ Baa1 BBB+ 2009 BBB Baa1 BBB+ 2010 BBB Baa1 BBB+ 2011 BBB Baa1 BBB+ 2012 BBB Baa1 BBB+ 2013 BBB+ Baa1 BBB+ 2014 BBB+ Baa1 BBB+ 2015 BBB+ Baa1 BBB+ 2016 BBB+ Baa1 BBB+ / = No Rating Data from Bloomberg Accessed December 12-14, 2016
149 Chapter 7: Conclusion 1- The Implications of Partisan External Borrowing
Introduction
Government partisanship shapes which external creditors MICs are likely to prioritize.
Right governments are more likely to use official credit. Left governments are more likely to use private finance. These partisan effects on foreign borrowing go away if a country has an unusually high deficit and thus unusually high financing requirement. The argument was tested quantitatively and the cases of South Africa, Botswana, Peru, and Thailand illustrated how external borrowing priorities are necessarily shaped by the real or perceived effects different creditors will have on governing party constituents. This is true across regions, degrees of finance ministry independence, regime types, and degrees of domestic market depth.
The partisan effect on MIC borrowing preferences has important implications for prudent borrowing strategies and debt sustainability, explaining and theorizing international capital flows to developing countries, the reach and impact of non-Western finance in the 21st century, and the importance of domestic revenue capacity for developing countries to maintain autonomy in the global financial system. In addition, clarifying inescapable political constraints of developing country debt levels and borrowing decisions makes clear that DMO effectiveness is not usefully conceived of as autonomy from politics. Instead, transparency is more likely central to ensuring
DMOs have the ability to manage debt sustainably.
These implications are spread over the final two chapters of this study. This chapter details the policy and analytical implications directly related to the partisan effect on external borrowing, as well as points of interest for future research. The next chapter focuses on DMO effectiveness and makes the normative policy recommendation that effective DMOs must be
150 transparent if they are to counteract the significant political constraints of debt management identified in this study.
Implications for Policy & Politics
This study has four major implications: clarifying the benefits of diversified external borrowing for debt sustainability, understanding what underpins borrower preferences and thus borrower ownership, the importance of MIC autonomy in shaping the reach of Chinese finance in the 21st century, and the role domestic revenue capacity has in maintain MIC autonomy in the global financial system.
First, debt sustainability is often discussed in terms of total outstanding debt.1 While total debt levels are certainly important for assessing debt sustainability, this study has shown that not all external debt is the same, especially for MICs. Because not all debt is the same, what matters is not only how much debt a government owes but the terms and conditions of that debt. In this sense, the politics of external borrowing preferences can matter a great deal over the long term in shaping the types of risks that will arise from their external debt decisions over time.
Specifically, governments that prioritize markets may be more responsive to domestic political economic demands, but take on higher interests rates and expose themselves to debt repayment risk by doing so. Governments that prioritize official creditors may have lower debt repayments and thus more sustainable debt obligations, but risk being less responsive as they accept loan conditions. The challenge for MICs is thus not only to keep debt levels sustainable, but to effectively manage these more specific benefits and risks of different external financial sources over time.
1 see, for example, Reinhart and Rogoff 2009.
151 For this reason, optimal MIC foreign borrowing policy would reflect diversified use of official and private options, at least until sustained growth brought the country into high-income status and thus a new position in the global economy. First, openness to “all potential creditors and markets” enhances MIC leverage and autonomy, ensuring MICs identify “the creditor that can offer the most beneficial or cost-effective terms and conditions” and negotiates accordingly.2
Using both official and private finance can maximize resources while increasing the likelihood that debt terms and conditions are manageable in the medium and long term. Second, diversified borrowing also enhances flexibility because it reflects sound relationships with each financial option. Maintaining strong benchmarks in private markets and good relationships with official creditors ensures responsiveness when global or national economic conditions change. In short, diversified borrowing could help keep debt sustainable by increasing MICs’ leverage and flexibility when borrowing, which in turn has stabilizing effects of the government’s fiscal space and overall capacity to sustainably contribute to economic and social development.
But because foreign borrowing policy is shaped by partisanship, diversified borrowing is not simply a matter of changing debt office strategy. Of the four cases in this study, Peru is the only one to exhibit diversification.3 It has the political space to do so because a relatively independent finance ministry balances out the preferences of recent left-leaning governments.
While the finance ministry would prefer avoiding markets and the left would prefer using them, the balance has kept Peru from the troubling debt position of South Africa and the missed opportunities of Botswana.
2 World Bank 2015b, 40–41. 3 Thailand does to a certain extent as well, but its domestic market depth makes it an unusual MIC in that foreign capital transfers have become less essential over time than they are for most MICs.
152 In South Africa, the ANC and its constituents explicitly reject the use of official creditors.
Only using private finance despite high interest rates and short maturities means borrowing policy has compounded revenue problems in the context of high government spending.4 If South
African politics allowed for use of official credit, cheaper and longer term loans from abroad may have softened the effects of and concerns about rapidly increasing national debt. Technical assistance, monitoring, and reporting associated with official creditors could also help address spending inefficiencies caused by corruption and revenue-side capacity problems. But partisan- driven politics prevent the National Treasury’s DMO from using official creditors’ lower interest rates and other benefits.
In Botswana, the BDP and finance ministry explicitly reject markets. While diamonds have allowed the country to achieve wealth uncommon in MICs, this has also led to a degree of complacency. Diamond revenues have decreased and deposits will be depleted by 2030.5 To be sure, conservative government saving in previous decades will ease immediate-term adjustments from diamond depletion.6 But post-diamond economic development will require sectoral diversification and social investment.7 Using markets could have provided a modest amount of cheap funds from eager investors, which would have allowed government to simultaneously save at desired levels and lay the sectoral and fiscal groundwork for the post-diamond era. At the very least, using markets during recent decades of economic success would have allowed Botswana to develop relationships with markets and set benchmark interest rates during good times, especially at historically low rates following the 2008 global financial crisis. But partisan economic preferences incentivized it not to do so.
4 International Monetary Fund 2018c, 5. 5 Lewin 2011a, 88. 6 Ibid. 7 Kojo 2010.
153 The partisan effect on external financing choices means the international financial infrastructure (i.e. official creditors) can only embed globalized financial markets if governing parties in borrowing countries allow it to do so. The authority to use multilateral and bilateral finance as more than lenders of last resort or as mere tools to “make financially desperate countries ready for entry into [integrated capital] markets” lies in domestic politics.8 For MICs with access to global financial markets, their borrowing decisions cannot be imposed from the outside.
This leads to a second policy implication, one related to official loan conditions and borrower ownership. The cases in this study show conditionality is the major reason MICs avoid official creditors at the expense of price benefits. While this is not an entirely novel point,9 delimiting MICs as a unique class of borrower and clarifying the partisan nature of their resistance to official credit suggests how official creditors must adapt if they are to appeal to
MICs, an explicit policy aim of many official creditors and stakeholders.10 In particular, the partisan effect suggests ownership of official loans likely means different things to different borrowers. Reconceptualizing borrower ownership along partisan lines may be key to increasing official creditors’ appeal in MICs.11 In other words, to appeal to MICs, official loan conditions must reflect borrower governments’ macroeconomic policy preferences and constituent interests.
Increasing borrower ownership has long been a focus for official creditors seeking to design loan conditions that are both appealing to borrowers and effectively implemented.12 On
8 The issue is framed by Pauly 2001, 471. 9 For example, Dollar and Svensson 2000; Vreeland 2003b. 10 Gurria and Volcker 2001; Ratha 2001; Griffith-Jones, Griffith-Jones, and Hertova 2008; Linn 2017. 11 While some suggest official creditors should be more selective in providing finance to only those countries with “good policies,” this is largely discussed in the poorer LIC context where donor “altruism” vis-a-vis strategic interests are a major analytical issue. For two summaries and treatments among a vast literature on aid selectivity, see Clist 2011; Clist, Isopi, and Morrissey 2012. 12 Johnson and Wasty 1993; Collier et al. 1997; Leandro, Schafer, and Frontini 1999; Gurria and Volcker 2001.
154 the latter, ownership “represents the [borrower’s] commitment to improved policies and institutions,” or the political will of borrowers to follow through on loan conditions ex-post.13 On the former, ownership also reflects the ex-ante incorporation of borrower preferences into loans and conditions in the first place. In this temporally prior sense, effective ownership requires that
“the locus of initiative for program formulation” lie with borrowers.14
The partisan effect on MIC borrowing choices brings precision to this ex-ante component of ownership. Given the partisan nature of macroeconomic preferences and interests, ownership should not be expected to mean the same thing to both right and left governments. Successfully increasing ownership requires borrower partisanship to be reflected in conditions. For example, right-leaning governments are likely to be open to traditional official policy conditions.15 For these governments, ownership may be achieved if incentives for implementing and sustaining orthodox macroeconomic policies are the focus of conditions. In contrast, left-leaning governments are likely to perceive ownership if loan conditions include labor protections rather than trade liberalization or privatization.16 These are but some suggestions for how the presence of ownership might be perceived differently in left and right MIC borrowers.
In practice, official creditors have recently taken a “provisional” approach to loan negotiations, leaving the definition of ownership imprecise and loan negotiations informal.17
Identifying partisanship as central to borrowing preferences helps clarify what official loans must include in different contexts if ownership is to exist. To take the World Bank as an example, the argument above suggests that while some moves away from the Washington Consensus are
13 Branson and Hanna 2000, 5. 14 Leandro, Schafer, and Frontini 1999, 288. 15 Putnam 1988, 457; Vreeland 2003a; Vreeland 2007, 62–66; Pinto 2013, 31–35; 102–104. 16 Caraway, Rickard, and Anner 2012. 17 Best 2014.
155 identifiable, its persistent emphasis on privatization may help explain continued resistance to the
Bank in left-leaning MICs.18 Official creditors’ shift away from infrastructure project loans into more far reaching governance loans that shape the role of both labor and capital in the economy may also minimize ownership, at least to the extent that governing parties benefit from protecting constituent groups or sectors from market exposure and public scrutiny.19
Whatever the specifics, new loan instruments explicitly designed to enhance ownership, such as the Bank’s Program-for-Results, should vary significantly across lenders if they are to increase ownership.20 While political, organizational, and ideational factors may make such change difficult,21 it seems that ownership requires accounting not just for borrower politics generally, but partisanship specifically.
It is possible to be agnostic about the efficacy of conditionality that increases ownership in such a fashion. The simple claim here is that, for better or worse, increasing ownership likely depends on accounting for partisan differences across MIC borrowers. At the least, partisanship provides a more systematic starting point for understanding how official lenders can avoid “one- size-fits-all” approaches that do not account for borrower contexts22 and appeal to MICs.
The effect of partisanship on MIC borrowing choices leads to a third policy implication related to the impact of Chinese lending. MICs’ ability to shop from various external financial options means they are not merely price-takers as powerful lending countries seek to shape 21st century global financial and economic orders. MIC partisanship, through the use of other private and official finance, will affect the reach of China in MICs. Differentiating Chinese lending from
18 On the persistence of privatization while other policy areas are more flexible, see Cormier and Manger 2018. 19 Navia and Velasco 2003; Wang 2016. See also discussion of Peruvian resistance to second generation reforms in official loans after the mid-2000s. 20 Cormier 2016. 21 Barnett and Finnemore 2004; Weaver 2008; Best 2014; Cormier 2018. 22 For discussions, see Stiglitz 2002; Stiglitz 2006; Rodrik 2006; Headey 2009.
156 other official lending is a research project underway elsewhere,23 but interviews in the four country case studies here suggest that left MICs prefer markets and right MICs prefer Western official lenders over Chinese loans due to China’s production-related loan conditions (tied inputs, use of Chinese labor, and collateral). While LICs may be in a different position, MICs have more autonomy and MIC preferences will shape the reach and effect of Chinese development finance. MICs will not simply be price-takers in the formation of 21st century global economic order.
A fourth implication is the crucial role revenue plays in financial autonomy.
Conventional wisdom tells us that debt can reduce fiscal capacity and growth if repayment obligations require an excessive reallocation of resources.24 But it is also interesting to consider the inverse relationship. To what extent does fiscal policy and revenue capacity shape control over borrowing and thus the ability to manage debt accumulation in the first place? The econometrics in Chapter 3 suggest that when a country has a budget deficit over 20%, and thus financing requirement greater than 20% of that year’s spending, it becomes difficult to borrow on terms and conditions that the government prefers. At some level, revenue capacity is central to MICs’ ability to maintain autonomy in the global financial system.
Analytical Implications for IPE
The first three policy implications stem from the theoretical position that partisanship shapes MICs’ foreign borrowing choices. The fourth policy implication suggests that at some
23 Among a growing literature detailed in Chapter 2, see Bräutigam and Gallagher 2014; Humphrey 2015; Wang 2016. 24 Reinhart and Rogoff 2009; Reinhart, Reinhart, and Rogoff 2012; International Monetary Fund 2018a.
157 level, in addition to partisanship, state capacity to generate and collect revenue affects external borrowing and thus MIC autonomy in the global financial system.
Making these claims requires giving more analytical credence to developing country domestic politics than the field of IPE normally does. The first analytical implication of this study, then, is that further unpacking domestic politics in developing countries can sharpen IPE debates and contributions to policy. The second analytical implication is that more work needs to be done on finance ministry power and effectiveness, especially in areas such as debt where finance ministries’ DMOs lie at the intersection of international and domestic politics.
First, the field of IPE needs to better account for variation in developing country foreign economic policy. To be sure, domestic political structures, “the governing coalitions which define policy objectives and the institutional organization which conditions policy instruments,” have a long lineage in IPE in the context of developed countries.25 But in developing countries,
IPE tends to focus on the systemic effects of globalization. This is particularly true in the IPE of finance, where private markets, dominant countries, and powerful multilaterals are the primary analytical focus of developing country integration.26 This is a major shortcoming for the field.
The above implications for borrowing policy, debt sustainability, loan conditionality, Chinese influence on global economic order, and state capacity only emerge because variation across
MICs is taken seriously in this study. Developing country autonomy and variation in domestic structures that explain how that autonomy is used in foreign economic policy should be a focus moving forward.
25 Katzenstein 1978b, 4–5. 26 Chapter 2 outlines the variety of ways in which developing country autonomy is not a major focal point in the field.
158 At a minimum, the study calls attention to the idea that MICs, due to relative economic size and accompanying political development, are analytically from LICs. More interestingly, partisanship helps identify how obstacles and opportunities for sustainable debt management vary across indebted MICs. To the extent that one ultimate task of IPE should be to provide
“[theories] which will enable us to understand the implications of globalization for development” and contribute to development practice by “work[ing] towards local and global strategies” that induce sustainable and egalitarian development, an analytical focus on varied domestic political structures in developing countries (such as parties and partisan economic agendas) is a useful starting point for future IPE contributions to national policies and global development agendas.27
The effect of partisanship on economic policy in developing countries has also been identified in FDI policy and investment protection laws.28 There appears to be a strong connection between a government’s macroeconomic preferences and its approach to different markets, be they trade, portfolio investment, or public debt markets. Insofar as partisanship is a domestic structure because it helps identify Katzenstein’s “governing coalitions which define policy objectives,”29 the interest groups that constitute general partisan categories may be important in other areas of developing country economic policy. Analytical focus on the presence and strength of unions, business groups, multinationals, global banks, or other partisan sub-groups may provide further insight into developing country strategies for global economic integration.
Second, a better understanding of the state institutions that lie at the intersection of the global economy and domestic politics needs more study because, as Katzenstein highlights,
27 Phillips 2014, 369. 28 Pinto 2013; Pinto, Weymouth, and Gourevitch 2010. 29 Katzenstein 1978b, 4–5.
159 institutional arrangements “[condition] policy instruments.”30 In MIC foreign borrowing, partisanship interacts with the structure and influence of the finance ministry. While this study shows partisanship clearly shapes borrowing priorities, this still means the bureaucracy can affect outcomes. In Peru for example, the relatively independent finance ministry keeps borrowing policy from only following left-leaning preferences. In contrast, South Africa’s highly-regarded National Treasury has trouble moderating the preferences of the governing party. Why is this the case? This will be taken up in future research. Systematically unpacking finance ministry strength could further explain a variety of developing country economic policies.
More broadly, while ministerial independence from politics has been a central focus for development studies,31 most work on the relationship between economic ministries and domestic politics considers central banks.32 Finance ministry independence is not as thoroughly studied, leaving the issue of finance ministry effectiveness unclear. To be sure, the work that finance ministries do is inherently political because finance ministries administer legislatively- determined budgets. Accountability and responsiveness to citizens, in terms of both tax policy and expenditure plans, make fiscal administration’s dependence on politics largely a feature rather than a bug.33 But this exposes more technical elements of national finances, such as debt, to political interference. Democratic values and state ministry influence on policy can seem at odds with one another, and government debt is a stage on which this tension plays out.
30 Ibid. 31 Some touchstones in this literature, more extensively discussed in Chapter 2, are Gerschenkron 1962; Evans 1979; Evans 1995; Kohli 2004. 32 Fischer 1995; Debelle and Fischer 1994; Gavin 2018. 33 Prichard 2015, chap. 6.
160 This is a difficult tension to resolve. On one hand, concerns about political interference in debt management include avoiding beneficial financing options, issuing unsustainable amounts of short-term debt, encouraging currency mismatch for short-term gains, or issuing public guarantees outside of formal processes or without the finance ministry’s knowledge.34 But on the other hand, political interference in the accumulation of debt is legitimate, as large foreign bond issues or any “loan from [a bilateral or multilateral] that includes [conditionality] clearly has political implications and may well be subject to political scrutiny without being qualified as undue political interference.”35
Striking a balance between political and technical influence is a real challenge. At the very least, it is problematic if debt offices do not have a means of communicating looming risks during annual budget processes.36 But this is not a thorough enough guide for designing institutional arrangements. There is a need to find some political and technical “division of labor” in budget and debt management, where:
“major decisions about the overall volume of indebtedness and… the budget, taxes, government spending programs, or other such fiscal indicators… are assigned to political decision makers while allowing technical professionals to seek the optimum risk-adjusted outcome within those parameters. This separation [would ideally] diminish the risk of fiscal or budgetary policy dominance over prudent debt management… [or] ‘undue political interference.’”37
The need to better understand how political and technical factors relate in finance ministries is thus another implication of this study, especially with reference to DMO effectiveness. The next chapter engages this theme directly. It argues that transparency is key to dealing with the very real need to ensure debt remains at sustainable levels, while also ensuring
34 World Bank 2015b, 13–14, 44–46. 35 Ibid., 14. 36 Ibid., 29–30. 37 Ibid., 13.
161 fiscal policy is a product of political processes. More work needs to be done, but the following chapter lays out why transparency is a practical starting point for understanding DMO effectiveness.
Future Research
The findings and implications yield numerous paths for further research. Quantitatively, the implications above could be sharpened by making this study’s dependent variable the independent variable in studies of debt repayment obligations and fiscal sustainability.
Qualitatively, the case selection attempted to cover as much MIC variation as possible.
However, two opportunities for further work on MIC external borrowing stand out. First, the study does not include a MIC with a deficit so large that the borrowing preferences of government cannot be prioritized. The econometrics suggest this happens when a government can only cover 80% of its budget with revenues. The addition of such a country case would complement the core partisanship argument, showing whether and how at some very high deficit level funding requirements negate the partisanship effect. Romania is a possible choice for this because it has had deficits above these levels across a variety of governments with different partisan leanings.
Second, the study does not include a MIC whose partisanship shifts from left to right for an extended period of time between 1990-2015. South Africa and Botswana are consistent one- party systems. Peru went from right to left over this 25-year period. Thailand’s volatile parties have meant left and right leaning leaders have exchanged office via coups and elections, but as discussed in Chapter 6 the success of Thaksin’s populism in the early 2000s brought politics generally to the left after the Asian Financial Crisis. A MIC with a more substantive shift from
162 left to right economic policy would thus cover the array of possible cases. Paraguay would provide the chance to trace the partisan effect when a right-leaning government replaces a left- leaning incumbent.
The research also gives rise to interest in related topics for future research. First, the
Thailand chapter notes how deepening domestic financial markets has allowed the government to minimize its need to draw on foreign finance.38 While the Asian Financial Crisis prompted interest in developing domestic markets, why has this not been more common? Why have the
Thais been able to successfully deepen these markets? Explaining variation in MIC domestic market depth would suggest why the total amount of financial resources available to MICs varies, would paint a fuller picture for understanding opportunities and obstacles MICs face in sustaining fiscal and state capacity, and would highlight the challenges poorer Low Income
Countries face as they grow into MICs that seek to develop their domestic financial markets.
Second, interviews reflect confusion and even misperceptions about the actual content of official creditor conditions. While some interviewees in this study say conditions are negotiable and flexible, other still refer to the Structural Adjustment programs that the Bank and others claim they eschewed back in the early 2000s.39 By definition official loan conditions intervene in domestic political economies to some extent, but the extent and form of conditionality appears to vary, at least over time if not across countries.40 To the extent that official lender conditionality has substantively changed, why do perceptions of conditionality content not match substance?
38 See Levine 1997. 39 See, for example, Rodrik 2006. 40 See Cormier and Manger 2018 on the World Bank. Regional multilaterals have less conditionality and are even more flexible. See Humphrey and Michaelowa 2013.
163 This is an important question not only for official lender policy and relations with lenders, but for understanding their ability to contribute to international economic stability and order.41
Third, finance ministry independence and accountability warrants further analysis. A particularly useful path for this is explaining why legal frameworks and processes for granting sovereign guarantees vary across countries.42 Whether to SOEs, subnational entities, or private companies, the presence of authoritative and transparent guarantee processes can help ensure guarantees are used for productive rather than patrimonial ends. This is central to effective government finance and debt sustainability, but many finance ministries struggle to influence and track guarantees. Research on the politics that underpin different legal and procedural frameworks for guarantees would not only be important in and of itself, but would begin to identify the forces that determine degrees of finance ministry independence.
Fourth and finally, the cases and related area literatures suggest conflicting interpretations of economic policy pressures in developing countries. On one hand, some posit a largely hegemonic neoliberal paradigm in economic policy in developing countries.43 On the other hand, others claim a populist shift left in reaction to rising inequality is evident.44 How can both be true, or what explains where one or the other is more the case?
A starting point, implicit elsewhere45 and in the cases here, is that it is not useful to view all national economic policies as internally consistent or coherent. Rather, different policies, even in the same country, are subject to different pressures. For example, many of the cases here show fiscal and borrowing policies are subject to left-leaning partisan preferences, while
41 Ruggie 1982; Pauly 2002. 42 CABRI n.d. 43 Harrison 2004; Fine 2009; Sandbrook 2014. 44 Cameron and Hershberg 2010; Levitsky and Roberts 2011; Sandbrook 2014, chap. 2 for a few non-Latin American cases. 45 Handley 2008.
164 orthodox trade and monetary policies persist under left governments. This is true in Peru and
Thailand, and partially true in South Africa (trade is more subject to union pressures there).
Delineating some economic policy areas from others seems useful for better understanding the politics behind foreign economic policy in developing countries. Reassembling different policy programs after breaking them down in such a way could yield insight that improves on overly- simple neoliberalism or populism policy framings in developing countries.
Conclusion
Partisan influence on MIC external borrowing policy carries implications. These include: identifying optimal borrowing policy and understanding the political obstacles that stand in the way of pursuing it; the constraints on international organizations’ ability to ease debt burdens before crises emerge; the definition of ownership and its importance in increasing official lending; the influence MICs will have on China’s financial power in the 21st century; the importance of state capacity in shaping MIC autonomy in a world of globalized finance. All of these implications stem from the effect of partisanship on foreign borrowing policy in MICs.
Future research on the effects of domestic politics on developing countries’ foreign economic policy will lead to further academic and policy implications.
The next and final chapter builds on many of these conclusions to make a prescriptive policy recommendation. It details why DMOs, the national ministries responsible for managing debt, must take political constraints seriously if they are to increase their ability to ensure debt remains sustainable. Taking political constraints seriously means seeing transparency as essential to combating undue political interference on debt management. This conclusion is detailed next.
165 Chapter 8: Conclusion 2- A Policy Recommendation for Effective Public Debt
Management in Developing Countries
Introduction
Sustainable public debt is essential for economic growth and social development in low and middle income countries.1 Public Debt Management Offices (DMOs) are the state agencies responsible for ensuring national debt positions are sustainable. But as detailed throughout this study, DMOs are necessarily constrained by politics.2 DMOs cannot easily affect fiscal policy and must fund whatever size of financing requirement emerges from annual budgets. Nor can
DMOs ensure risk-optimal decisions are made, as political factors influence external borrowing decisions. Explicit or implicit guarantees can also limit a DMO’s ability to ensure debt remains sustainable. These constraints mean DMOs cannot operate independently from politics.
This gives rise to an important question: how can DMOs increase their ability to ensure public debt remains at sustainable levels despite significant political constraints? Most discussions of national economic ministries emphasize autonomy when analyzing their ability to pursue sustainable economic policies. For example, central banks can best ensure stable monetary policy when independent from politics.3 But given the inevitable political constraints
DMOs face in accumulating and managing debt, autonomy is not a useful lens for assessing debt management abilities or designing institutional arrangements that aim to increase debt sustainability.
1 Frieden 1991; Gurria and Volcker 2001; Fallon et al. 2001; Loser 2004; Wheeler 2004; Gill and Pinto 2005; Reinhart and Rogoff 2009; Gunter, Rahman, and Shi 2009; Reinhart, Reinhart, and Rogoff 2012; Kopits 2013; Bua, Pradelli, and Presbitero 2014. 2 Wheeler 2004; World Bank 2015b. 3 Rogoff 1985; Goodman 1991; Fischer 1995; Bernhard, Broz, and Clark 2002.
166 Instead this chapter argues that, given such significant political constraints, transparency is crucial for increasing a DMO’s ability to sustainably manage debt. Transparency allows foreign and domestic stakeholders to help DMOs hold policy makers accountable for the effects policies have on debt sustainability.4 Yet, to date, debt transparency is inadequate in developing countries.5 Accordingly, this chapter concludes by identifying specific reporting practices that can improve developing country debt transparency.
Altogether, this chapter takes the form of a prescriptive policy recommendation, separating it from the empirical analysis undertaken in the preceding chapters. The prescription is based on that empirical analysis, which shows the significant and inevitable political constraints on the accumulation of debt in MICs. While transparency is proposed as a practical approach for increasing DMO effectiveness in sustainable debt management, the chapter stops short of analyzing whether or not partisanship has an effect on transparency. In this sense, this prescriptive chapter also provides a framework for new policy-relevant research.
The first section reviews DMOs then summarizes the political constraints, referring back to the cases in preceding chapters, that DMOs face as they work to ensure debt remains sustainable. Constraints include DMOs’ limited role in budget processes, the minimal constraints provided by fiscal or debt laws in developing countries, political influence over borrowing decisions, and the effects of guarantees. The chapter then outlines the literature on economic ministry capacity, showing how the constraints illustrated in the cases signal DMO capacity cannot be usefully conceived of as autonomy. Instead, transparency is key to DMO efforts to sustainably manage debt. The chapter concludes by highlighting the practical ways DMOs can increase transparency and the widespread shortcomings observed in debt transparency to date.
4 On the effects of transparency in other areas of fiscal policy, see Carlitz 2013; Wehner and de Renzio 2013. 5 International Monetary Fund and World Bank 2018.
167 Debt Management Offices in Developing Countries
Prudent public debt management is crucial for ensuring national debt levels are sustainable. Sustainable debt levels are important because they ensure governments can predictably contribute to economic and social development. Unsustainable debt implies excessively high debt burdens and costs, which cannibalize resources that could otherwise be directed to capital and social investment.6 Unsustainable debt also minimizes the fiscal space governments have to pursue countercyclical policy in response to global or national economic shocks.7 Over time, unsustainable debt can create a vicious circle of higher borrowing costs as national debt levels increase and markets charge higher interest rates to reflect that risk.8
Ultimately, the risks of default and debt-related crises increase as debt positions worsen.9
The importance of sustainable debt makes debt management a crucial task for national economic ministries. DMOs are the bureaucratic units to which debt management responsibilities are delegated. DMOs are typically located in finance ministries because (as detailed below) debt management is intimately connected to fiscal policy and cash management. At times, particularly in developing countries, some debt management functions may be scattered across the finance ministry and the central bank. Ideally this is not the case, but even where debt management functions are scattered, the bureaucrats responsible for debt management are tasked with the same aims and face the same challenges.10
Regardless of precise organizational structure, debt management aims are relatively straightforward. DMOs are responsible for managing all domestic and foreign debt obligations to
6 Wheeler 2004, 6. 7 Ibid., 10–11; International Monetary Fund 2018a. 8 Wheeler 2004, 6–7. 9 Reinhart and Rogoff 2009. 10 Wheeler 2004, 60–64; World Bank 2015b, 7.
168 “ensure that the government’s borrowing needs are met efficiently and that the stock of government debt… [is] managed” in a way that minimizes cost and risk.11 This work takes the form of maintaining relationships with markets and creditors, forecasting, devising debt management strategies, and reporting on both strategies and outcomes.
In practice, DMOs are typically organized according to these tasks.12 First, the portfolio management group is the DMO’s outward-looking unit, responsible for maintaining relationships with domestic and foreign financial actors then identifying and negotiating opportunities.
Second, the risk management group devises medium- and long-term debt strategies, providing a framework within which the front office interacts with markets and negotiates with creditors.
Third, the treasury operations group serves an accounting role, settling and recording transactions. Reflecting private bank arrangements, these functions are often shorthanded as, respectively, DMO front, middle, and back offices. Even if not formally cohered as such in a particular country, these functions are the essence of debt management.
While details may vary and in some instances functions may be scattered, the tasks and aims of debt management are consistent. But debt management, and thus the work of a DMO, does not occur in a vacuum. In fact, DMO operations are highly constrained by politics.
Political Constraints on Debt Management
DMOs are constrained by a number of political factors. First, DMOs cannot control the amount of debt government accumulates each year. Annual financing needs are a function of budgets, and the gap between revenues and expenditures cannot be easily affected by DMOs. In developing countries, this is accentuated by minimal or flexible fiscal and debt laws that often
11 Wheeler 2004, 4; World Bank 2015b, 11. 12 Wheeler 2004, 69–72; World Bank 2015b, 42, 59.
169 place little constraint on budget outcomes. Second, after financing requirements are finalized,
DMOs cannot borrow independent of political influence. Particularly important in developing countries is external finance, and the distributional implications of different external financing options necessarily politicizes borrowing decisions. Third, guarantees of state-owned enterprise or private sector debts can bring obligations that a DMO did not approve or negotiate onto the central government’s balance sheet. These constraints are detailed in turn below. Material from the four cases of South Africa, Botswana, Peru, and Thailand are used to illustrate and summarize these constraints throughout the discussion.
The Effects of Fiscal Policy and Flexible Laws
The core practical task for a DMO is to fund the government budget. Annual funding needs are determined each year by the gap in revenues and expenditure that emerges from a government’s budget. Whatever financing requirement the budget yields, the DMO must fund it.
In this sense, DMOs are best understood as relatively passive entities that do not shape fiscal policy but manage the implications of politicians’ budgets.
Having to react to fiscal policy is the first major political constraint on DMOs. Indeed, according to the World Bank, forecasting the effects of different budgetary decisions and providing that information to policy makers during budget deliberations is the ideal role of a
DMO in the budget process. Expenditure and revenue decisions, and thus the overall size of debt, should be the purview of “political decision makers” while the DMO’s role is to minimize debt risk “within those parameters.”13 In other words, debt managers can do little more than simply
“advocate the adoption of a credible fiscal strategy to ensure that current and projected levels of
13 World Bank 2015b, 8.
170 public sector indebtedness remain on a sustainable path.”14 DMOs cannot control fiscal policy or the size of financing requirements.
Fiscal and debt laws are important to consider in assessing the extent of this constraint on
DMO operations. It is possible that laws minimize the latitude politicians have when making budgets, placing a check on fiscal policy in the name of debt considerations. But in many developing countries, fiscal and debt laws are procyclical rather than constraining on fiscal policy.15 Furthermore, as shown by the case studies below, in practice many fiscal and debt laws in developing countries are either non-existent, constantly altered, or difficult to implement and enforce.16 Flexible fiscal and debt laws ultimately reinforce rather than limit the significant political constraints on debt management operations.
In response to relatively flexible legal frameworks, some DMOs maintain internal debt benchmarks. These are reference points under which a DMO is comfortable with its debt position.17 Key benchmarks include total debt levels, interest rate levels, fixed or floating rate ratios, foreign or domestic exposure ratios, and short-term or long-term maturity ratios.18 But many DMOs do not maintain a comprehensive set of strategic benchmarks.19 Moreover, if a
DMO maintains benchmarks, they are not enforceable. DMOs cannot point to benchmarks with any surety that they will alter a government’s fiscal policy preferences. Benchmarks inform forecasting and medium-term debt strategies, but the advisory role of DMOs means their internal benchmarks do not easily constrain politicians’ budgets. Indeed, the cases of South Africa,
Botswana, Peru, and Thailand provide evidence for these points in the preceding chapters. Each
14 Wheeler 2004, 5. 15 Bova, Carcenac, and Guergil 2014. 16 Kopits 2001; Lledó and Poplawski-Ribeiro 2013; Lledó et al. 2017a. 17 Wheeler 2004, chap. 7. 18 see, for example, Cabral 2015, 28. 19 Ibid., 25.
171 MICs’ DMO was shown to have a passive role in the annual budget process while operating in the context of minimal or flexible fiscal and debt laws.
Political Borrowing Decisions & Guarantees
The second major constraint on DMO efforts to ensure debt is managed sustainably arises after financing needs are finalized and borrowing decisions are made. Particularly relevant for developing countries is external finance, so focus here is on how a “common constraint to borrowing… is the retention by the parliament or congress of the power to ratify certain loan agreements, particularly those raised abroad” from official creditors (bilaterals and multilaterals) and markets.20
As this study has shown, the key distinction between these options is that official credit is cheaper but comes with conditions, while market-based finance is more expensive but condition- free. This study has also shown that external borrowing choices are constrained by government partisanship because DMOs must borrow on terms and conditions that appeal to the governing party. Right-leaning party preferences are likely to align with official creditor conditions, making the effects of using cheaper official credit amenable to constituents. Left-leaning parties and constituents are likely to resist trade, privatization, fiscal, procurement, production, or other adjustments and conditions, leading them to prioritize the autonomy provided by private finance.
These partisan politics of borrowing mean DMOs cannot simply borrow based on cost.
This is not necessarily a normative problem. Large foreign bond issues or any “loan from [a bilateral or multilateral] that includes [conditionality] clearly has political implications and may well be subject to political scrutiny without being qualified as undue political interference.”21 In other words, because external financing choices have distributional and policy implications,
20 World Bank 2015b, 10. 21 Ibid., 14.
172 political interference is expected and even appropriate insofar as it enhances political buy-in to the effects of borrowing decisions.22
But this can and often does lead to disagreement between politicians and the DMO about whether official or private finance is optimal.23 For example, pressure to use more short-term finance than the DMO may prefer, to borrow in a particular currency, or to avoid conditions from bilaterals and multilaterals can make DMOs borrow in ways that they would prefer not to.24
Given political influence over external loan borrowing decisions, the political element of external borrowing decisions is inescapable and debt managers must borrow accordingly. While
DMO technocrats work to minimize risk within those parameters, external borrowing decisions are ultimately constrained by political preferences.
In addition, the third major constraint on DMOs are guarantees of state-owned enterprise or private sector debts that often come from external financial sources. Loan guarantees are granted by politicians to aid financing in these sectors.25 Guarantees are contingent liabilities on the central government balance sheet and can be managed accordingly. At best, these guarantees are explicit and increase the amount of risk a DMO must manage.26 Often, however, implicit guarantees emerge where the DMO or government did not formally guarantee a third-party debt and the third-party borrowed anyway. In such instances, the government would have trouble not taking responsibility for repayment in case of default. At times, implicit guarantees can mean the amount of risk DMOs must manage is actually much higher than it is either aware of or that is
22 on buy-in or ownership, see Dreher 2009, 235; Best 2014, chap. 5. 23 see Wheeler 2004, 18–19. 24 World Bank 2015b, 13. 25 Ibid., 14–15. 26 see, for example, Bachmair and Bogoev 2018.
173 explicitly covered on the balance sheet.27 The cases in preceding chapters clarify these political borrowing and guarantee constraints on DMO efforts to manage debt.
Implications for DMO Effectiveness
The cases in this study illustrated three major constraints developing country DMOs face in the sustainable management of public debt. The first are budgets. DMOs can, at most, serve an advisory role during budget deliberations and must fund whatever size of financing requirement emerges. The second is political influence over external borrowing decisions. The most cost- effective borrowing choices may not be possible depending on the policy preferences of the governing party. The third are guarantees of SOE debts, which can bring obligations onto the government’s balance sheet that the DMO would prefer to avoid or of which the DMO may not be initially aware.
For purposes of space, this study focused on external borrowing because it is a crucial resource for most developing countries. But it is important to note that domestic borrowing decisions may also be constrained by political factors or other agencies that do not prioritize sustainable debt. Among many examples, central bankers may advocate for or independently perform short-term domestic issuances to minimize inflation or defend a currency, creating debt management risks in the process.28 Ideally monetary policy is coordinated with, but operationally distinct from, debt management. But this is not necessarily the case, creating room for additional constraints on a DMO’s ability to manage debt sustainably.29
27 see Schich 2018; CABRI n.d. 28 Wheeler 2004, 35–39; World Bank 2015b, 32–34. 29 World Bank 2015b, 32–36.
174 Given these constraints, how can DMOs be effective in sustainably managing debt? This section argues that bureaucratic autonomy, the criteria on which large economic ministry effectiveness is most often assessed, is not useful for thinking practically about how DMOs can increase their influence over debt outcomes. Instead, transparency is crucial for increasing
DMOs’ ability to sustainably manage debt.
Beyond Autonomy
DMOs are “upstream” ministries at the core of national economic management.30 Many analyze such the capacity of ministries to produce sustainable policies in terms of their autonomy from political influence. This is because autonomy implies an agency has the ability to implement policies with a longer-term view of implications than politicians. Indeed, a common analytical focus for those concerned with autonomy is the degree to which the agency has its
“own distinct set of decision-making procedures” that provides its bureaucrats incentives
“characterized by meritocratic recruitment and predictable, long-term career rewards.”31 In other words, an autonomous agency has internal procedures that separate it from political processes. It also has incentive structures where political ties are not necessary for bureaucrats to keep their jobs or advance their careers.32
A common example of the importance of autonomy for upstream economic ministries is a central bank. Independent central banks are delegated the authority to manage monetary policy in a way that limits inflation in the name of medium- and long-run macroeconomic stability. This contrasts with the alternative focus on short-term consumption or “social” benefits that inflationary monetary policy can provide (and politicians are likely to prefer).33 While the degree
30 Holt and Manning 2014, 719–722. 31 Evans and Rauch 1999, 749. 32 See Centeno et al. 2017. 33 Rogoff 1985.
175 of monetary policy delegation in a country depends on politics,34 it is “well established” that
“politically independent central banks should be in charge of monetary policy.”35 That is, despite the various degrees of central bank independence observed across countries, it is widely agreed that independent central banks are better able to ensure monetary policy is sustainable.
However, political constraints mean DMO effectiveness cannot be conceived of in the same way as central bank effectiveness in monetary policy.36 As detailed above, fiscal policy shapes the amount of debt a DMO must manage and borrowing decisions have policy implications that warrant scrutiny by politicians. In other words, DMOs should be significantly shaped by political constraints. World Bank technical debt management guidelines emphasize these points: the “overall volume of indebtedness”37 and external borrowing decisions can be
“subject to political scrutiny without being qualified as undue political interference.”38
If the significant political constraints DMOs face are not only unavoidable in practice but legitimate in purpose, how can DMOs increase their ability to ensure public debt is managed with an eye to sustainability? Guidance can be found in other central bank analyses. The core benefit of independence is that it increases the credibility that monetary policy will prioritize macroeconomic stability, which will be perceived positively by markets. Where central banks are not independent, credibility can still be achieved by pegging exchange rates because pegs provide a transparent “promise” to markets that central bank policy will work to maintain that peg.39 In this sense, even where central banks are highly constrained by politics, the benefits of independence can be obtained insofar as policies are transparent enough to provide credibility.40
34 Goodman 1991; Bernhard, Broz, and Clark 2002; Gavin 2018. 35 Fernández-Albertos 2015, 218. 36 On differences between fiscal policy and monetary policy more generally, see Wren-Lewis 2013. 37 World Bank 2015b, 8. 38 Ibid., 14. 39 Broz 2002, 865. 40 Copelovitch and Singer 2008; Fernández-Albertos 2015, 222.
176 Transparency is “the ease with which the public can verify and punish government misbehavior with respect to an institutional commitment.”41 Focus on transparency moves analysis away from the ability of a ministry to design and implement policies through relatively apolitical processes. Instead, focus shifts to the more fundamental task of providing information in order to increase credibility in the eyes of audiences that have a stake in the policy area.
Transparency in Debt Management
The audiences that react to and depend on the sustainability of public debt are extensive.
They include foreign and domestic investment markets, foreign and domestic businesses, citizens who expect stable government contributions to public goods provision and social programs, and politicians concerned with balancing the interests and preferences of these audiences. In this light, the question becomes whether a DMO can produce information in a way that allows these audiences to aid its efforts to keep public debt at sustainable levels.
Transparency has been shown to have moderating effects on unsustainable tendencies in other fiscal policy areas. In developed countries, transparency minimizes the presence and effects of electoral budget cycles.42 Transparency is also essential if fiscal rules are to hold national expenditures and revenues to sustainable levels.43 Others note the core benefit of independent fiscal watchdogs in the developed world, such as the Congressional Budget Office in the United
States, is that they increase the transparency of public finances, which can moderate politicians’ budgetary decisions in the name of sustainability.44
In developing countries, transparency increases the efficiency and effectiveness of public financial resources. For example, while not a panacea, transparency can play a role in combating
41 Broz 2002, 865. 42 Alt and Lassen 2006. 43 Kopits 2001, 15. 44 see all chapters in Kopits 2013.
177 corruption and the resource curse.45 Aid flows are more likely to be effective when donors ensure their lending is transparent, in part because it incentivizes recipient transparency.46 Transparency can also enhance developing country tax systems. By “establishing more explicit links between taxation and expenditure,” transparency can “[foster] expectations of reciprocity and trust,” increasing both awareness of the benefits that come from public expenditure and the total amount of public resources available as citizens become more willing to participate in the tax system.47
Finally, budget transparency has been shown to include many similar benefits, which emerge because “budget transparency facilitates citizen monitoring of government.”48 While non- democratic regimes may not be as susceptible to domestic pressures for budget transparency,49 at the very least external financial markets and businesses are audiences non-democratic regimes appeal to with more information.
These effects in other fiscal policy areas suggest transparency can have similar effects on national debt positions, making it a plausible tool for enhancing a DMO’s ability to ensure debt levels remain sustainable. At a minimum transparency increases accountability to markets, which has been shown to decrease borrowing costs, a benefit for any DMO.50 Operational benefits include better coordination within and across debt-related agencies.51 As Wheeler summarizes:
“In a debt management context, policy transparency has two major advantages. It reduces market uncertainty as to the objectives of debt management policy, and it creates expectations about the consistency of future policy decisions. This helps build investor confidence and, if matched by greater investor participation, lowers the risk or uncertainty premium embedded in the price of the government’s securities. Because decisions by government debt managers can be monitored for
45 Kolstad and Wiig 2009. 46 Ghosh and Kharas 2011; Gaventa and McGee 2013. 47 Prichard 2015, 256–257. 48 Carlitz 2013, s54. Also see Wehner and de Renzio 2013. 49 Wehner and de Renzio 2013. 50 Glennerster and Shin 2008; Cabral 2015, 9; Bastida, Guillamón, and Benito 2017. 51 Cabral 2015, 9.
178 consistency with policy goals, transparency also facilitates greater accountability and lower agency costs within the debt office.”52
In practice, a DMO can increase transparency by “feed[ing]” global and domestic audiences “with economic information more accurately and frequently.”53 The most basic form of debt transparency involves working with international financial institutions that surveil and publish information about national economies. This includes agreeing to publicize annual IMF
Article IV reports and participating in global macroeconomic data collection efforts sponsored by the IMF, World Bank, and others.54 DMOs have at least six additional tools for providing more information to stakeholders, with which these public audiences can hold policy-makers accountable for their effects on national debt.
First, making public the institutional arrangements that govern debt management, namely through formal legislation outlining the purpose and role of a DMO alongside other parts of the state, provides a benchmark for debt management procedures against which audiences can assess the quality of policy-making.55 Second, publishing annual debt management reports detailing current positions, annual financing plans, and forecasted effects are fundamental for informing stakeholders.56 Third and relatedly, medium-term debt strategies and debt sustainability assessments provide “cost and risk indicators or targets [which are] particularly valuable to investors and other stakeholders.”57 These provide essential forward-looking information that audiences can use to monitor debt policy and hold policy makers accountable for ensuring sustainable strategies are followed.58 Fourth, detailed reporting on all loan agreements and
52 2004, 58. 53 Glennerster and Shin 2008, 187. 54 Ibid., 187–189. 55 World Bank 2015b, 8–11. 56 Ibid., 17–21. 57 Cabral 2015, 9. 58 World Bank 2015b, 17–21.
179 guarantees in a regular statistical bulletin can provide transaction-level information.59 Fifth, hosting and reporting on the results of regular audits can provide third-party assessments for audiences.60 Sixth, publishing internal rules and benchmarks can provide a framework of sustainability that, despite not being law, can inform audiences what thresholds are seen as sustainable by a DMO.61
Yet few countries maximize debt transparency. A 2018 IMF and World Bank study finds that, on average, developing countries do not have “adequate” debt reporting practices and nearly half of all low-income countries exhibit “weak” transparency.62 For example, more than half of the developing countries in that study do not publish debt management strategies.63 Even more fundamental components of debt transparency are lacking. Half of the countries in that study do not formalize debt procedures and institutional arrangements in national legislation.64
Meanwhile, reporting to IMF and World Bank databases is often incomplete, with developing countries much less-likely to report debt data than high income countries.65 Such shortcomings in debt transparency are a major problem given the crucial role transparency has in increasing a
DMO’s ability to keep debt levels sustainable in the face of political constraints.
Conclusion
The inevitability and legitimacy of constraints on DMO operations means a DMO’s ability to sustainably manage debt cannot be thought to depend on autonomy. Instead, given unavoidable political constraints on debt management, transparently informing markets and
59 Ibid., 22–24. 60 Ibid., 25–28. 61 Wheeler 2004, 59. 62 International Monetary Fund and World Bank 2018, 8–10. 63 Cabral 2015, 10. 64 International Monetary Fund and World Bank 2018, 10. 65 Ibid., 8.
180 citizens about debt positions and strategies is the key to increasing a DMO’s ability to sustainably manage debt. Transparency yields informed audiences, who in turn can help hold politicians accountable for ensuring policy does not have unduly negative effects on national debt positions.
Many specific tools for increasing debt transparency are noted in the final section. To date, use of these tools is lacking across developing countries. This yields clear policy implications for DMOs: the benefits of transparency for sustainable debt management have yet to be realized and opportunities for increasing debt transparency abound.
To be sure, given the significant political constraints DMO operations face, DMOs may also face challenges in increasing transparency. The relationship between politics and debt transparency itself lies outside the scope of this study, which detailed and explained the significant constraints DMOs face as they attempt to manage debt sustainably. It is also possible that there is a link between partisanship and transparency, given the influence of partisanship on the specific component of external borrowing. While these require full inquiries beyond this specific chapter and this dissertation generally, the evident political constraints on DMO operations make it clear that transparency is likely crucial for DMO effectiveness.
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202 Appendices
Appendix A: Table 1 Model 8 Country-Year List Country Years Country Years Angola 2006-2014 Lebanon 1997-2014 1994; 2001-2003; 2010- Albania 2014 Sri Lanka 1999-2014 Argentina 1990-2003; 2013-2014 Moldova 1996-1997; 2007-2012 Armenia 2004-2011; 2013-2014 Mexico 1990-2999; 2007-2013 Azerbaijan 1993-1995; 2007-2014 Mongolia 1992-1994; 2009-2014 Bulgaria 2001-2014 Mauritius 1990-2014 Belarus 1994-2014 Malaysia 1995-2014 Bolivia 1990-2006 Nigeria 2010-2012 Brazil 1990-1993; 1996-2014 Nicaragua 1990-1992; 2007-2014 1990-1993; 2006; 2009; Botswana 2010-2011 Pakistan 2010 China 2012-2014 Peru 1990-2011 1997-1999; 2002; 2007- Colombia 2014 Philippines 1991-1992; 1999-2014 Papua New Costa Rica 1990-2014 Guinea 1990-2001; 2013-2014 Dominican Republic 1990-1993; 1996-2014 Paraguay 2005-2014 Algeria 1994-2008 Romania 1990-2014 Georgia 1998-2000; 2005-2014 El Salvador 1997-2014 1990; 1993-2005; 2008- Guatemala 1990-2014 Thailand 2011 Honduras 2002-2014 Tunisia 1990-2011 Indonesia 1995-1998; 2007-2014 Turkey 1990-1997; 1007-2014 India 2009-2012 Ukraine 1998-2000; 2004-2014 Jamaica 1990-2014 Vietnam 2011-2012 Kazakhstan 1996-2003; 2009-2014 South Africa 1994-2014 Zambia 2012-2014
Notes: Only MICs with population >1m included Only MIC country-years in which external borrowing took place are included Lesotho is the only MIC to only use all official or all private external finance in across their observations, so it is dropped to avoid selection effects. Appendix D1 includes Lesotho in a model and results do not change. Other observations are lost to years of no external borrowing, lags, and data missingness as specifications include more covariates.
203 Appendix B: Main Models Variable Information (And Country Income Level Coding) Variable Source Coding Notes Name % Official World Development Indicators (July DT.COM.OFFT.CD divided by (DT.COM.OFFT.CD + Credit 6 2018) DT.COM.PRVT.CD)
Right Govt Beck et al. 2001 Right only = 1; Center and Left = 0; EXECRLC or GOV1RLC depending on party system as noted in paper
Budget World Development Indicators (July GC.TAX.TOTL.GD.ZS divided by GC.XPN.TOTL.GD.ZS; both as (Rev/Exp) 6 2018) % of GDP
Credit Rating Standard & Poor's Manually coded using country's final credit rating in calendar year. Data coded using Bloomberg in Nov 2016
UN Vote Bailey, Strezhnev, and Voeten 2017 PctAgreeUS Domestic World Development Indicators (July FS.AST.DOMS.GD.ZS ; % of GDP Credit 6 2018) Crisis Laeven and Valencia 2012 Crisis = 1 if country in crisis at one point of the calendar year. Unless otherwise noted, models include manually-included crises since 2012, the end of this dataset (Venezuela 2012-2015; Ukraine 2013-2014; Russia 2014; Brazil 2014-2015; China 2015).
IMF program World Development Indicators (July DT.DIS.DIMF.CD; Total IMF Purchases; IMF = 1 if country had any 6 2018) non-reserve tranche drawings from IMF that year (i.e. if drew on any IMF funds that come with conditions; see (see https://www.imf.org/external/pubs/ft/bop/2018/pdf/Clarification0218. pdf)
Politcal Beck et al. 2001 yrcurnt; 0= election year, otherwise years until planed election Cycle
Democracy PolityIV Polity2 Reserves World Development Indicators (July FI.RES.TOTL.DT.ZS; % of Total External Debt 6 2018) ST Debt World Development Indicators (July DT.DOD.DSTC.IR.ZS; % of Reserves 6 2018) MIC status World Bank History of income group for each country-year coded manually using World Bank file OGHIST.xsl, found here: https://datahelpdesk.worldbank.org/knowledgebase/articles/378834- how-does-the-world-bank-classify-countries
204 Appendix C: Table 1, Model 8 Summary Statistics Variable N Mean Min Max SD Commitment Dependent Variable 654 0.59 0.00 1.00 0.35 Right Govt X Fin Req 654 0.18 0.00 1.55 0.33 RightGovt 654 0.25 0.00 1.00 0.43 Fin Req 654 0.74 0.29 2.12 0.22 Commitment Dependent Variable (lag) 654 0.60 0.00 1.00 0.35 Credit Rating 654 15.80 4.00 24.00 6.08 UN Vote 654 0.20 0.04 0.59 0.10 Domestic Credit 654 56.95 -45.59 248.90 43.91 Crisis 654 0.11 0.00 1.00 0.31 Political Cycle 654 1.98 0.00 6.00 1.40 Democracy 654 5.52 -7.00 10.00 4.86 Debt Service 654 3.33 0 46.66 3.27 Reserves 654 61.64 1.51 2370.95 165.80 ST Debt 654 72.73 0.00 1472.64 107.95
205
Appendix D: Robustness Checks of Main Model
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Right Govt X Fin Req 0.210* 0.247** 0.272*** 0.280** 0.187* 0.268** 0.193** 0.220** 0.214* 0.193** 0.156* 0.110+
(2.01) (2.76) (3.33) (2.78) (2.21) (3.07) (2.69) (2.85) (2.16) (2.68) (2.04) (1.71)
RightGovt -0.111 -0.141* -0.168* -0.160* -0.0952 -0.164* -0.0995+ -0.118* -0.0958 -0.100+ -0.0835 -0.107*
(-1.41) (-2.05) (-2.34) (-2.11) (-1.46) (-2.55) (-1.82) (-2.06) (-1.23) (-1.81) (-1.42) (-2.38)
Fin Req -0.0142 -0.0775 -0.126 -0.0551 -0.0336 -0.0678 -0.0418 -0.0680 -0.0525 -0.0374 0.0111 0.0512
(-0.32) (-1.38) (-1.62) (-0.89) (-0.41) (-1.37) (-0.83) (-1.06) (-0.90) (-0.73) (0.28) (1.18)
DV lag 0.650*** 0.701*** 0.880*** 0.651*** 0.732*** 0.626*** 0.752*** 0.683*** 0.615*** 0.734***
(4.58) (5.40) (5.98) (3.93) (5.48) (3.63) (6.15) (5.68) (5.13) (5.52)
Credit Rating 0.00671 -0.000447 0.00802 -0.00216 0.00787 -0.0000978 0.00451 0.00461 0.00265 0.00458 0.00605 0.00643
(1.11) (-0.06) (0.99) (-0.32) (1.12) (-0.01) (0.80) (0.76) (0.33) (0.80) (1.16) (1.42)
UN Vote -0.235* -0.348*** -0.205 -0.216+ -0.267** -0.250* -0.239** -0.295** -0.274* -0.248** -0.197* -0.217*
(-2.26) (-3.44) (-1.30) (-1.90) (-2.93) (-2.17) (-2.73) (-2.87) (-2.05) (-2.83) (-2.23) (-2.53)
Domestic Credit -0.000845* -0.00121*** -0.000277 -0.00154** -0.000570 -0.00130* -0.000763* -0.00100** -0.00138*** -0.000820* -0.000598 -0.000285
(-2.07) (-3.34) (-0.57) (-3.09) (-1.42) (-2.43) (-2.45) (-2.67) (-3.63) (-2.30) (-1.28) (-0.78)
Crisis 0.0128 0.0551 0.0302 0 0.0131 0.0225 0.0204 0.0335 0.0557 0.0224 0.0199 0.00902
(0.48) (1.39) (0.70) (.) (0.45) (0.60) (0.67) (0.99) (1.42) (0.73) (0.76) (0.42)
Political Cycle -0.00187 -0.00505 0.00254 -0.000373 -0.00389 -0.00496 -0.00197 -0.00416 -0.00710 -0.00223 0.00150 -0.000634
(-0.26) (-0.51) (0.23) (-0.04) (-0.35) (-0.59) (-0.24) (-0.48) (-0.87) (-0.28) (0.17) (-0.18)
Democracy 0.000132 -0.00103 -0.000587 0.00101 -0.00311 0.00189 0.000222 -0.000321 0.000634 0.000268 -0.000343 -0.00318
(0.06) (-0.46) (-0.34) (0.42) (-0.51) (0.79) (0.12) (-0.14) (0.22) (0.14) (-0.19) (-1.58)
DebtService 0.00196 0.0143+ 0.00835 0.0145+ 0.00816 0.00293 0.00421 0.00470 0.00102 0.00460 0.00273 0.00237
(0.45) (1.68) (0.64) (1.70) (1.13) (0.59) (0.81) (0.89) (0.39) (0.86) (0.65) (0.97)
Reserves 0.0000597 0.0000662 0.0000903+ 0.0000334 0.0000566 0.0000235 0.0000374 0.0000390 0.0000370 0.0000376 0.0000242 0.000131+
(1.50) (1.38) (1.67) (0.59) (1.02) (0.56) (0.93) (0.91) (0.89) (0.97) (1.10) (1.84)
Short Term Debt 0.000137+ 0.000133 0.0000350 0.0000342 -0.0000127 0.0000781 0.0000824 0.0000582 0.0000792 0.0000821 0.0000196 0.000115
(1.96) (0.71) (0.34) (0.18) (-0.15) (0.89) (0.94) (0.73) (0.67) (0.93) (0.28) (0.98)
206
GNI Growth (Annual %) 0.00142
(0.61)
GNI -1.05e-15
(-0.10)
Capital Account (BoP) 3.08e-11
(1.57)
Private External Interest Rate 0.000671
(0.11)
Official/Bonds DV Lag 0.718***
(4.71)
Bilateral/Total DV Lag 0.331*
(2.07)
------
N 660 503 475 582 468 559 654 615 510 662 666 666
Country FE YES YES YES YES YES YES YES YES YES YES YES YES
Year FE YES YES YES YES YES YES YES YES YES YES YES YES
------+p<0.10 * p<0.05, ** p<0.01, *** p<0.001 All models identical to Table 2, Model 8. See Table 2 notes for more. Panel Cluster-Robust Standard Errors Model Specific Explanations and Notes: Model 1- Disbursement Dependent Variable (rather than commitments, or what agreed to in a given year; see discussion in paper on why primarily use commitments) Model 2- Countries using any amount of IDA that year dropped Model 3- Countries going to IMF that year dropped Model 4- Countries in crisis dropped Model 5- Only democracies kept Model 6- Growth (dropped in in main models in favor of credit ratings, crisis, etc.). Treated as pre-determined but partially endogenous.
207 Model 7- GNI (dropped in in main models in favor of credit ratings, crisis, etc.). Treated as pre-determined but partially endogenous. Model 8- Capital Account (dropped in main models in favor of more specific/granular debt factors). Treated as pre-determined but partially endogenous. Model 9- Interest rate on private external debt. Many country-years are coded as 0, which appears unlikely to accurately reflect the cost of borrowing. Moreover, WDI codes this differently than no-borrowing years. Accordingly, this model drops all observations where the interest rate is coded as 0, allowing an interesting robustness test. But data uncertainty means this specification belongs in the appendix. Treated as pre-determined but partially endogenous. Model 10- Lesotho included Model 11- Official vs only Bond Markets Dependent Variable. Model 12- Bilateral as % of Total Debt Dependent Variable. Model 11 and 12 Notes: It is crucial to note deconstructed multilateral, bilateral, bond, and bank data ae only available with respect to disbursements. Data is not available for commitments at that level of disaggregation for the dependent variable. So this does not fit with the theory of this study, which is about new debt commitments taken on in a given year. Regardless, for thoroughness, it is helpful to show that the effects remain when deconstructed official and private groupings to isolate and separately test multilateral, bilateral, and bond finance disbursements.
208 Appendix D1: Models of MIC External Borrowing With China Variables (1) (2) (3) Right Govt X Fin Req 0.211** 0.197** 0.178*
(2.69) (2.79) (2.40) RightGovt -0.105+ -0.0898 -0.0927+ (-1.74) (-1.60) (-1.65) Fin Req -0.0221 -0.0188 -0.0308
(-0.35) (-0.33) (-0.61) DV lag 0.627*** 0.703*** 0.751***
(3.59) (6.00) (5.62) Credit Rating 0.00768 0.00628 0.00560
(1.14) (0.87) (0.95) UN Vote -0.230* -0.171 (-2.10) (-1.27) Domestic Credit -0.001000* -0.000813* -0.000596+
(-2.31) (-2.11) (-1.71) Crisis 0.0252 0.0256 0.0105 (0.81) (0.80) (0.35) Political Cycle -0.00312 -0.00349 -0.00204
(-0.39) (-0.41) (-0.25) Democracy 0.000777 -0.000114 -0.000701
(0.27) (-0.05) (-0.38) Debt Service 0.00364 0.00515 0.00435 (0.70) (0.91) (0.84) Reserves 0.0000248 0.0000336 0.0000630+
(0.62) (0.81) (1.72) Short Term Debt 0.0000973 0.0000778 0.0000671
(1.00) (0.86) (0.77) Chinese Finance (Curr USD) 4.79e-11 (0.77) Chinese Loan Dummy 0.0633 (0.89) UN Vote China 0.00487 (0.07) N 654 654 654 Country FE YES YES YES Year FE YES YES YES ------'+p<0.10 * p<0.05, ** p<0.01, *** p<0.001
209 All models identical to Table 2, Model 8. See Table 2 notes for more. Panel Cluster-Robust Standard Errors Model Specific Explanations and Notes: Model 1- Amount of Chinese Bilateral Finance (treated as endogenous system instrument) Model 2- Dummy for whether Chinese bilateral loan that year (treated as endogenous system instrument Model 3- Alignment with China in UN voting (treated as exogenous)
210 Appendix D2: LICs, no partisan effect
Figure 3: Adjusted Predictions of LIC Partisan External Borrowing 1
.9
.8
.7
.6
% of External Finance From Official Creditors Finance % of External .4 .6 .8 1 1.2 1.4 1.6 Financing Requirement (Revenue/Expenditure)
GMM Model (similar to Table 2, Model 8) Non-Right Govt Panel Cluster-Robust SEs Right Govt 95% Confidence Intervals
211 Appendix F: Interview List (further information available from author)
Interview# Date Name? Type Style How record 1 March 10 2017 Anonymous Multilateral Semi-structured Live recording 2 April 4 2017 Anonymous Multilateral Semi-structured Simultaneous notes Post-event notes (4 hours 3 Jan 12 2017 Anonymous Bilateral Unstructured later) 4 May 26 2017 Anonymous Academic Semi-structured Simultaneous notes 5 May 29 2017 Anonymous Domestic Unstructured Email 7 June 1 2017 Anonymous Academic Semi-structured Simultaneous notes 8 June 1 2017 Anonymous Multilateral Semi-structured Simultaneous notes 9 June 1 2017 Anonymous Multilateral Semi-structured Simultaneous notes 10 June 2 2017 Anonymous Multilateral Semi-structured Email 11 June 2 2017 Anonymous Multilateral Semi-structured Live recording 12 June 2 2017 Anonymous Bi & Multilateral Semi-structured Email 15 June 5 2017 Anonymous Domestic Semi-structured Simultaneous notes 16 June 7 2017 Anonymous Multilateral Semi-structured Simultaneous notes 17 June 7 2017 Anonymous Multilateral Semi-structured Simultaneous notes 18 June 8 2014 Anonymous Domestic Semi-structured Simultaneous notes 19 June 12 2017 Anonymous Multilateral Semi-structured Simultaneous notes 20 June 13 2017 Anonymous Domestic Semi-structured Simultaneous notes 21 June 15 2017 Anonymous Domestic; Multilateral Semi-structured Simultaneous notes Specific 22 June 16 2017 Anonymous Domestic Questions Email 23 June 20 2017 Anonymous Domestic Unstructured Simultaneous notes 24 June 22 2017 Anonymous Multilateral Semi-structured Live recording 26 June 27 2017 Anonymous Domestic Semi-structured Simultaneous notes
212 27 July 14 2017 Anonymous Multilateral Semi-structured Live recording 28 July 14 2017 Anonymous Multilateral Semi-structured Live recording 30 July 26 2017 Anonymous Domestic Semi-structured Simultaneous Notes 31 July 28 2017 Anonymous Multilateral Unstructured Live recording 33 Aug 4 2017 Anonymous Multilateral Semi-structured Live recording 34 Aug 7 2017 Anonymous Multilateral Semi-structured Live recording 35 Aug 16 2017 Anonymous Domestic Structured Email 39 Aug 2 2017 Anonymous Academic Semi-Structured Simultaneous Notes 40 Aug 4 2017 Anonymous Academic Semi-Structured Simultaneous Notes 41 Aug 7 2017 Anonymous Domestic Semi-Structured Simultaneous Notes 42 Aug 8 2017 Anonymous Multilateral Semi-Structured Simultaneous Notes 43 Aug 8 2017 Anonymous Domestic Semi-Structured Live recording 44 Aug 11 2017 Anonymous Underwriter Semi-Structured Simultaneous Notes 45 Aug 14 2017 Anonymous Foreign Banker Semi-Structured Live recording 46 Aug 16 2017 Anonymous Domestic Structured Live recording 47 Aug 17 2017 Anonymous Domestic Semi-Structured Live recording 48 Aug 17 2017 Anonymous Domestic Semi-Structured Live recording 49 Aug 17 2017 Anonymous Domestic Semi-Structured Live recording 50 Aug 18 2017 Anonymous Domestic Semi-Structured Live recording 51 Aug 22 2017 Anonymous Domestic Semi-Structured Simultaneous Notes 52 Aug 23 2017 Anonymous Domestic Unstructured Simultaneous Notes 53 Aug 25 2017 Anonymous Domestic Unstructured Simultaneous Notes 54 Aug 28 2017 Anonymous Domestic Structured Email 55 Aug 28 2017 Anonymous Multilateral Structured Live recording 56 Aug 29 2017 Anonymous Multilateral Semi-Structured Simultaneous Notes 57 Aug 29 2017 Anonymous Domestic Structured Simultaneous Notes 58 Aug 30 2017 Anonymous Domestic Unstructured Simultaneous Notes
213 59 Sept 4 2017 Anonymous Multilateral Semi-Structured Simultaneous Notes 60 Sept 4 2017 Anonymous Multilateral Structured Email 61 Sept 4 2017 Anonymous Domestic Structured Email 62 Oct 17 2017 Anonymous Domestic Semi-Structured Live Recording 65 Aug 8 2017 Anonymous Multilateral Semi Structured Simultaneous Notes 66 Aug 10 2017 Anonymous Multilateral Semi Structured Live recording 67 Aug 22 2017 Anonymous Academic Unstructured Email 68 Aug 29 2017 Anonymous Multilateral Semi-Structured Simultaneous Notes 69 Aug 30 2017 Anonymous Domestic Unstructured Simultaneous Notes 70 Aug 30 2017 Anonymous Domestic Unstructured Simultaneous Notes 72 Sept 11 2017 Anonymous Domestic Semi Structured Simultaneous Notes 73 Sept 12 2017 Anonymous Banker Structured Simultaneous Notes 74 Sept 12 2017 Anonymous Banker Structured Simultaneous Notes 75 Sept 12 2017 Anonymous Domestic Semi Structured Simultaneous Notes 76 Sept 12 2017 Anonymous Domestic Structured Email 77 Sept 12 2017 Boineelo Peter Domestic Semi Structured Live recording 78 Sept 12 2017 S Fologang Domestic Semi Structured Live recording 79 Sept 13 2017 Anonymous Intl Banker Semi Structured Simultaneous Notes 80 Sept 14 2017 Anonymous Multilateral; Domestic Structured Simultaneous Notes 81 Sept 15 10am Anonymous Domestic Structured Simultaneous Notes 82 Sept 15 2pm Anonymous Domestic Semi Structured Simultaneous Notes 84 Oct 18 2017 Anonymous Multilateral Semi-Structured Live Recording 85 Oct 19 2017 Anonymous Multilateral Semi-Structured Live Recording 86 Oct 23 2017 Anonymous Domestic Semi-Structured Simultaneous Notes 87 Oct 24 2017 Anonymous Domestic; Multilateral Semi-Structured Simultaneous Notes 88 Oct 24 2017 Anonymous Multilateral Semi-Structured Simultaneous Notes 89 Oct 27 2017 Anonymous Multilateral; Domestic Semi-Structured Simultaneous Notes
214 90 Oct 27 2017 Anonymous Multilateral; Academic Semi-Structured Simultaneous Notes 91 Oct 30 2017 Anonymous Multilateral; Domestic Structured Email 92 Oct 31 2017 Anonymous Multilateral; Domestic Structured Live Recording 93 Nov 2 2017 Anonymous Domestic Structured Email 94 Nov 2 2017 Anonymous Academic Structured Live Recording 95 Nov 6 2017 Anonymous Domestic Semi-Structured Simultaneous Notes 96 Nov 8 2017 Anonymous Domestic Structured Simultaneous Notes 97 Nov 14 2017 Anonymous Multilateral Semi-Structured Live Recording 98 Nov 30 2017 Anonymous Domestic; Investor Semi-Structured Simultaneous Notes 99 Nov 30 2017 Anonymous Domestic Semi-Structured Simultaneous Notes 100 Nov 30 2017 Anonymous Domestic Semi-Structured Simultaneous Notes 101 Dec 1 2017 Anonymous Domestic Semi-Structured Simultaneous Notes 102 Dec 2017 Anonymous Academic Structured Email
215