Frontier Markets Debt Monitor Rising Debt and Climate Risk

Frontier Markets Debt Monitor Rising debt and climate risk February 19, 2020 Khadija Mahmood, Associate Economist, [email protected] Xiyan Huang, Research Assistant, [email protected] Editors: Emre Tiftik, Director, [email protected]; Sonja Gibbs, Managing Director, [email protected] • Driven mainly by government borrowing, the debt to GDP ratio in frontier markets hit a fresh all-time high of 114% in Q3 2019, with total debt nearing $3.2 trillion, up by nearly $75 billion in the first three quarters of 2019. • Government debt is now over 51% of GDP. Zambia, Mozambique, Bahrain and Oman have seen the largest rise since Q3 2018. Heavy public debt burdens could undermine efforts to mitigate climate risks, especially in low-income countries (LICs). • Some $255 billion of frontier market debt will mature through end-2021, with FX debt making up more than half of it. • Special Feature: Debt and Climate Risk in Low-income Countries: External debt is on the rise, though private creditors have cut exposure—reflecting concerns about debt transparency/sustainability and growing awareness of climate vulnerabilities

Frontier market debt rose nearly $75 billion in the first three quarters of 2019, reaching a fresh high of 114% Chart 1: Frontier market debt reaches a new all-time high, of GDP ($3.2 trillion). Compared to the bigger gain of over driven by government borrowing* $240 billion in 2017-18, the rise in debt in 2019 was relatively $ billion, Q3 of each year % of GDP, weighted avg. moderate, suggesting that the increase in FM debt over the 3500 120 last year was the slowest since 2015—in line with a substantial Households % of GDP (rhs) 115 3000 slowdown in bond issuance activity in 2019 (see below). Non-financial corp. 110 2500 105 Around 60% of countries in our sample have wit- Government 100 nessed a rise in debt ratios since Q3 2018, led by Zam- 2000 Fin. sector 95 bia, Bahrain, Oman and Mozambique. In contrast, the Repub- 1500 90 lic of Congo, Croatia and Gambia have cut debt ratios. 1000 85 80 Government debt remains the single most significant 500 driver for most frontier economies. At above 51% of GDP, gov- 75 ernment debt is over 5 percentage points higher than in 2015. 0 70 2005 2008 2011 2014 2017 During this period, non-financial corporate debt has been broadly stable at around 38% of GDP and household debt-to- Source: IIF, National Sources, IMF, BIS; *excludes Venezuela GDP rose modestly by about 2 percentage points to over 17%. Chart 2: Rising debt ratios for Zambia, Bahrain, and Oman At around $140 billion in 2019, total bond issuance in frontier markets was at its slowest pace since 2015. Nearly % points, diff. btw. 2018Q3 and 2019Q3, top and bottom 7 45% of issuance was in foreign currency and sovereigns ac- ZM BH counted for 80% of total issuance activity. Some $255 billion OM Households of frontier market bonds and loans will mature through 2021, MZ EC Non-fin. corps of which over 40% is in U.S. dollars. PK TT Government Climate debt trap and debt sustainability: Concerns FM-29 over debt management and transparency have become even TN KZ more important, particularly in climate-vulnerable countries: JM with LICs as a group more exposed to global weather and cli- KW GM mate related losses, those with high/rising public debt levels HR may face major financing challenges to take adaptive CG measures to mitigate climate-related vulnerabilities. -15 -10 -5 0 5 10 15

Source: IIF estimates, National Sources, IMF, BIS

Chart 3: Total FM-29 (plus Venezuela) debt/GDP levels Chart 4: Climate-related disaster losses per income group 1998-2017—high income countries have had large losses in dollar terms however, LICs have had biggest hit as % of GDP % of GDP, Q3 2019 estimates 300 Government debt USD billion 2.0 250 Non-government debt 1400 Absolute value in USD bn 1.8 1200 1.6 200 1000 % of GDP(rhs) 1.4 1.2 800 1.0 150 600 0.8 400 0.6 100 0.4 200 0.2 50 0 0.0

0 CI TZ SV TT JO RS PE KZ EC LK PK VE CR KE CG TN BD VN RO JM BH DO HR ZM MZ GH MA GM KW OM income

Low income High income Lower-middle Source: IIF estimates, National Sources, IMF, BIS, Haver; VE for Upper-income tracking purposes only Source: Economic losses, poverty and disasters 1998-2017 report, Center for Research on the Epidemiology of Disasters CRED, UNISDR Chart 5: Exposure to climate risks vs. changes in debt levels in frontier economies Chart 6: Low-income countries are least ready to take cli- index score, exposure to climate change mate adaptation measures 0.6 ZM index score, readiness subindex 0.6 EC BD 0.8 KE LK CG 1997 2007 2017 0.5 TZ PK 0.7 JM RO PE GM VN SV CI 0.5 BH 0.6 GH DO CR HR 0.5 0.4 MZ RS KW TT MA 0.4 0.4 KZ 0.3 0.3 TN 0.2 0.3 ppts., chg. in total JO debt/GDP since Q3 2015 0.1 0.2 0.0 -50 -30 -10 10 30 50 Mature Emerging Frontier Low-income Source: NG-GAIN, IIF Frontier Debt Monitor database markets markets markets countries

Source: ND-GAIN, IIF Chart 7: Frontier market bond issuance activity dropped in

2019, with the lowest sovereign issuance since 2011 Chart 8: High upcoming debt repayments for the frontier USD billion, FM29 corporate and sovereign bonds economies in our sample 200 180 Sovereigns-LC USD billion, FM-29 corp and sov bonds and loans 140 160 Corporates-LC Local currency EUR 140 Sovereigns-HC 120 USD Other foreign 120 currencies Corporates-HC 100 100 80 80 60 60 40 20 40 0 20 2004 2006 2008 2010 2012 2014 2016 2018 0 Source: Bloomberg, IIF. *includes only long-term bonds (>1 yr.) 2020 2022 2024 2026 2028

Source: Bloomberg, IIF.

Special Feature: Chart S.1: Rising debt burden for low-income countries— Debt and Climate Risk in Low-income Countries slowdown seen likely External debt in LICs topped 55% of GDP: Across the 70 % of GDP, both sides low income countries (LICs) that are eligible for PRGT financing, 60 55 External debt (short-term) outstanding external debt reached close to $490 billion in 50 External debt (long-term)* 2018—over $150 billion higher than in 2013 (Chart S.1). With 50 General half of the LICs at high risk of (or in) debt distress at present, 40 government debt (rhs) many heavily indebted poor countries are now more in debt 45 than that they were a year after maximum debt relief was 30 reached. Bangladesh, Cambodia, Kenya and Zimbabwe have 40 20 seen the biggest rise in debt ratios since 2016. 35 Rise in government debt likely to slow: The buildup in ex- 10 ternal debt has been accompanied by a sharp rise in general government debt, which surpassed 50% of GDP in 2018—up from 0 30 2006 2010 2014 2018 37.5% in 2013. With Sudan, Zambia, Liberia and Rwanda re- cording the largest surge in debt ratios since 2016, IMF esti- Source: World Bank, IMF, IIF; *includes IMF credits mates suggest that government debt for this group will peak at close to 52% of GDP in 2020. Private creditors have limited appetite for LIC debt: Alt- Chart S.a2: Private creditors appetite for LIC debt has slightly reduced in recent years hough greater access to international markets has resulted in a more diversified creditor base for many LICs, their reliance on % of GDP % 12 10 private creditors remain very limited: publicly guaranteed debt External debt of private sector owed to private creditors accounts for only 3.3% of GDP. The 10 - publicly nonguaranteed* 9 private sector’s external debt in LICs remains below the levels Share of private creditors in seen in 2014/15, highlighting the difficulties to mobilize interna- 8 public and publicly 8 tional resources into LICs in recent years (Chart S.2). guaranteed 6 external debt (rhs) 7 Reliance on USD debt on the rise: At close to 40% of GDP, public and publicly guaranteed external debt accounts for over 4 6 70% of total external debt in LICs. Dollar-denominated debt 2 5 makes up nearly 65% of that (25% of GDP), leaving many LICs more exposed to sudden-shifts in global risk sentiment. Bangla- 0 4 desh recorded the sharpest increase in USD-debt in recent years. 2006 2008 2010 2012 2014 2016 2018

Growing interest expenses: While most mature market sov- Source: World Bank, IMF, IIF; * There is no comprehensive data on creditor ereigns continue to enjoy a low interest rate environment, rising base of publicly non-guaranteed debt of private sector. interest expense has become a burden for many LICs in recent years, with total interest payments on external debt totaling to Chart S.3: High debt levels make it hard for low-income countries to fund sustainable development goals some $10.8 billion in 2018 (1.2% of GDP)—up from $2.7 billion (0.4% of GDP) in 2010. Bangladesh, Kenya and Djibouti saw the index, SDG index* largest rise in interest expenses in recent years. 80 75 Lack of timely data: Along with ongoing concerns about debt 70 transparency and rapid debt buildup, addressing information GUY gaps for LICs (e.g. lack of timely macroeconomic and market 65 data), remain crucial to mobilizing international private capital 60 into these climate-fragile countries—a prerequisite for achieving 55 ETH the ambitious Sustainable Development Goals (Chart S.3). 50 AFG PNG Climate concerns: Many LICs are highly exposed to climate 45 COD risk. Those with high and/or rising debt levels will face even 40 CAF % of GDP, external debt more acute risks arising from the physical and transition effects 35 0 10 20 30 40 50 60 of climate change. While higher public debt levels will reduce fiscal space for development investment, increasing awareness Source: UN SDG index, World Bank, IIF; *SDG index score could be inter- of climate risks among international investors could lead to a preted as the percentage of achievement towards 2030 UN Sustainable De- velopment Goals. further slowdown in private financial flows into LICs. iif.com © Copyright 2020. The Institute of International Finance, Inc. All rights reserved. Page 3

Chart S.4: Greater differentiation in LIC debt build-up Chart S.5: USD-denominated external debt in LICs percentage point, chg. in general government debt since 2016 % of GDP % 30 45 64 Public and publicly 20 RWA SEN 40 guaranteeed debt (PPG) 62 MDV CMR 35 10 CIV KEN Share of USD-denominated 60 30 debt in PPG (rhs) 0 TZA 58 AFG KHM 25 -10 MDA COD CAF 20 56 -20 MOZ 15 54 -30 YEM 10 ZWE -40 COG 5 52 %pts, chg. in external debt since 2016 -50 0 50 0 5 10 15 2006 2008 2010 2012 2014 2016 2018

Source: World Bank, IMF, IIF Source: World Bank, IMF, IIF

Chart S.6: LICs face rising payments on external debt Chart S.7: LICs: net interest expense on general government debt $ billion percent 12 1.4 % of GDP, avg. 2020/21 7 GHA 10 1.2 Interest expense on external debt 6 BDI ZMB 8 1.0 5 % of GDP (rhs) 6 0.8 4 3 4 0.6 2 2 0.4 1 % of GDP, avg. 2017/18 0 0.2 0 2006 2008 2010 2012 2014 2016 2018 0 1 2 3 4 5 6 7

Source: World Bank, IMF, IIF Source: World Bank, IMF, IIF

Chart S.8: Climate physical risk vs government debt Chart S.9: Climate transition risk vs government debt index, vulnerability to climate risk (physical risk) index, climate transition risk* 0.7 NER 40 LBR 35 LSO 0.6 30 MRT 25 TCD 0.5 COG 20 MDV 15 CPV 0.4 10 %pts change in gen. gov. debt/GDP since 2013 5 % of GDP, 0.3 gen.gov. debt 0 -10 0 10 20 30 40 0 20 40 60 80 100 120 140

Source: ND-GAIN, IMF, IIF Source: UN SDG index, IMF, IIF; *SDG-13 climate index can be in- terpreted as the percentage of achievement towards 2030 Climate Goals. An inverse of it represents climate transition risk

Table 1: Frontier Market Debt by Sector % of GDP Households Non-financial corporates Government Financial Sector Q3 2019 Q3 2018 Q3 2019 Q3 2018 Q3 2019 Q3 2018 Q3 2019 Q3 2018 Global 60.2 59.6 92.5 91.6 88.3 86.0 81.4 81.7 Mature markets 72.2 72.3 91.3 90.6 109.9 107.5 109.0 109.7 Emerging market* 40.3 38.4 94.4 93.4 52.1 49.9 35.1 34.8 Frontier markets (ex- 17.3 16.9 38.7 39.0 51.3 49.9 6.8 6.6 Venezuela) FM Asia 10.2 10.2 51.7 50.6 58.4 56.7 2.6 2.8 Bangladesh 9.8 9.7 37.2 37.6 32.2 31.5 1.9 2.1 Pakistan 2.8 2.8 14.3 13.4 75.6 70.6 0.7 0.9 Sri Lanka 11.3 11.8 53.5 51.0 83.0 81.9 5.0 5.0 Vietnam 20.5 20.3 119.7 117.0 54.6 56.2 4.9 5.2 FM Europe 15.7 15.7 36.4 38.5 36.9 37.3 10.3 10.9 Croatia 34.2 34.0 89.2 93.7 71.9 75.3 5.8 7.2 Kazakhstan 8.8 8.8 28.3 30.8 20.8 20.9 21.3 22.3 Romania 15.9 16.0 31.9 33.8 37.3 36.8 3.6 3.6 Serbia 18.4 17.9 22.5 21.0 53.2 55.5 4.1 5.3 FM Latam (ex-Venezuela) 12.7 12.4 19.4 18.9 28.9 27.7 5.1 4.9 Costa Rica 39.6 40.5 22.1 23.4 56.3 52.4 11.1 10.3

Dominican Republic 12.6 12.4 15.2 14.6 51.9 50.1 5.8 5.9

Ecuador 15.9 15.3 23.2 20.4 48.3 45.5 1.7 1.9 El Salvador 29.1 29.3 24.9 24.0 68.0 67.1 3.7 6.0 Peru 15.1 14.4 40.6 39.9 26.7 26.0 10.1 9.2 Jamaica 24.5 23.4 8.8 10.9 96.2 98.2 8.8 7.5 Trinidad & Tobago 21.7 20.6 32.5 32.8 48.4 44.3 13.8 13.2 Venezuela** 0.0 0.1 21.3 15.2 206.4 142.6 3.3 4.4 FM Africa 12.0 11.9 20.8 21.5 54.3 52.8 1.9 2.2 Congo, Republic of 3.1 3.0 17.2 16.8 80.8 94.1 1.4 1.3 Cote d’Ivoire 6.2 6.5 23.2 21.4 52.8 52.4 1.3 2.1 Gambia 6.3 6.6 1.2 1.3 82.2 86.7 0.2 0.3 Ghana 2.6 2.8 17.9 19.2 62.8 58.8 4.4 2.7 Kenya 7.8 7.9 20.7 21.2 61.3 59.0 1.8 2.1 Morocco 26.3 24.9 39.2 41.4 65.2 65.0 2.4 4.1 Mozambique 6.9 7.1 23.7 24.8 106.7 100.0 2.3 2.7 Tanzania 4.9 4.9 8.4 8.4 37.6 37.1 0.5 0.6 Tunisia 36.9 38.8 32.1 31.6 75.0 75.5 3.0 3.6 Zambia 4.1 4.5 11.2 12.8 88.5 74.4 0.8 1.1

FM Middle East 44.2 42.0 42.7 45.8 49.9 47.7 19.7 16.0 Bahrain 45.3 42.4 36.9 38.4 100.0 93.2 82.5 67.2 Jordan 36.3 35.1 44.9 45.8 94.5 94.4 6.7 6.3 Kuwait 53.4 51.2 39.9 44.8 15.1 16.0 10.8 9.5 Oman 32.7 30.3 48.9 51.1 58.2 51.8 11.8 8.0 Sources: IIF estimates, National Sources, BIS, IMF, Haver. *covers our EM30 country sample from the Global Debt Monitor; **just for tracking purposes.

Table 2: Frontier Market Debt by Sector $ billion (Q3 of Non-financial Financial Households Government each year) corporates corporates 2009 254 532 568 207 2019 483 1103 1415 187 Source: IIF Frontier Markets Debt Database

Table 3: Frontier Market Countries plus Venezuela Country name Country code Bahrain BH

Bangladesh BD Congo, Republic of. CG Costa Rica CR Côte d'Ivoire CI Croatia HR Dominican Republic DO

Ecuador EC El Salvador SV

Gambia, The GM Ghana GH

Jamaica JM Jordan JO

Kazakhstan KZ Kenya KE

Kuwait KW Morocco MA Mozambique MZ Oman OM Pakistan PK Peru PE Romania RO Serbia RS Sri Lanka LK Tanzania TZ Trinidad and Tobago TT Tunisia TN Venezuela VE Vietnam VN Zambia ZM

Appendix: IIF frontier markets debt data

The FM dataset comprises of 29 frontier market countries (FM-29) plus Venezuela:

• Household debt figures are taken from national sources and if not available, then they are estimated using loans to other domestic sectors using data from IMF FSI and debt per adult statistics from Credit Suisse Global Wealth Databook. • Non-financial corporate debt is estimated as the summation of cross-border bank loans (BIS), outstanding bonds (Bloom- berg) and domestic loans (IMF, World Bank). • Financial sector debt statistics are derived from countries’ financial accounts. For countries that do not compile financial accounts, financial sector indebtedness is estimated as the summation of cross-border bank loans (BIS) and outstanding bonds (Bloomberg). • Government debt statistics are taken from IMF WEO.