II Facts on Existing Public Debt Structures ublic debt in emerging market countries differs P in several respects from that in advanced Figure 1. Advanced Economies and Emerg- economies. First, average debt levels were tradition- ing Market Countries: Public Debt Stocks ally equivalent to a lower share of GDP in emerging and Debt Composition market countries than they were in advanced (In percent of GDP) economies; the gap has closed in recent years, partly as a result of reductions in the debt of advanced economies (Figure 1). Second, reliance on externally 85 Domestic and Foreign Debt Issued issued debt has been far greater in emerging market by Emerging Market Countries countries than in advanced economies. Third, while 75 the structure of external debt of emerging market Advanced economies3 countries is similar to that of advanced economies, 65 the structure of their domestic debt—in terms of ma- All emerging turity, currency composition, and the prevalence of markets2 1 55 indexed debt—is very different. Large emerging The remainder of the section reviews such differ- markets1 ences in greater detail, first, by considering external 45 1992 94 96 98 2000 02 and domestic debt separately and, second, by offer- ing a consolidated view. 100 Composition of Total Debt: Domestic Unweighted Average, 1992–2002 External 80 Public Debt in Emerging Market 60 Countries Versus Advanced Economies 40 Structure of International Debt The international sovereign debt of emerging mar- 20 ket countries consists mainly of medium-term and 0 long-term fixed-interest-rate bonds denominated in 1 All 2 Asia foreign currency. Bank loans used to be the main G-7 Large Latin Middle Transition America Emerging Emerging East Africaand form of financing during the 1970s and 1980s. A Markets Markets Economies stock conversion of loans into bonds took place through the Brady deals; this helps explain the drop Sources: IMF, World Economic Outlook (September 2003); and IMF in loans, and rise in bonds, in the early 1990s (Figure staff estimates. 1Argentina, Brazil, Chile, China, Hungary, India, Indonesia, Israel, 2, first panel). When developing countries re-entered Korea, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, international credit markets in the 1990s, they did so Thailand,Turkey, and Venezuela. 2Countries listed in footnote 1 above plus Bulgaria, Colombia, mainly through bond issues (Figure 2, second Costa Rica, Côte d’Ivoire, Croatia, Ecuador, Egypt, Jordan, Lebanon, panel). The prevalence of bond financing is not Morocco, Nigeria, Pakistan, Panama, Peru, Ukraine, and Uruguay. unique to emerging market countries: its relative im- 3Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, portance has grown even more sharply in advanced Norway, Portugal, Spain, Sweden, United Kingdom, and United States. Note: The authors of this section are Marcos Chamon, Olivier Jeanne, and Jeromin Zettelmeyer. 1In this paper, “external” (or “international”) and “domestic” refer to the jurisdiction where the debt is issued. 7 ©International Monetary Fund. Not for Redistribution II FACTS ON EXISTING PUBLIC DEBT STRUCTURES Figure 2. Structure of External Public Debt Figure 3. Emerging Market Countries: in Emerging Market Countries Fixed- Versus Floating-Rate Sovereign (In billions of U.S. dollars) Bond Issues (In billions of U.S. dollars) 350 Stocks of Privately Held Debt 300 100 Bonds 250 Fixed interest rate 80 200 Loans 150 60 100 50 40 0 1980 84 88 92 96 2000 Floating interest rate 20 120 New Issues 100 0 Bonds 1980 82 84 86 88 90 92 94 96 98 2000 02 80 Source: Capital Data, Bondware and Loanware. 60 40 Loans 20 advanced economies. The share of the EMBIG con- 0 1980 84 88 92 96 2000 03 sisting of debt with remaining maturities over 20 years declined from 40 percent in the mid-1990s to Sources:World Bank, Global Development Finance (2003); Capital about 20 percent by the end of 1999, and has stabi- Data, Bondware and Loanware. lized since then (Figure 4, top panel). The decline stems from two factors. First, the 30-year bonds is- sued through the Brady deals are gradually becom- ing less important in the stock of emerging market countries’ debt as new debt is issued. Second, ex- economies, where virtually all international borrow- cluding the Brady bonds, the average maturity of ing is through bonds. new emerging market countries’ bond and loan is- Most internationally issued public debt carries a sues is significantly lower than for advanced fixed interest rate—for both advanced economies and economies, and has declined substantially over the emerging market countries. Much of the emerging past two decades (Figure 4, bottom panel).2 market debt issued in the 1970s and 1980s had a Most sovereign debt issued internationally by both floating rate. Certain types of Brady bonds also had a emerging market countries and advanced economies floating rate, and the proportion of floating-rate is in foreign currency (Table 1). Only a handful of bonds was relatively high until the mid-1990s: in advanced economies issue a substantial share of 1994, about 40 percent of JPMorgan’s Emerging their international sovereign debt in their own cur- Markets Bond Index Global (EMBIG) carried a float- rency. This does not imply that governments in ing rate. As new bond issues began to take off in the emerging market countries and advanced economies mid-1990s and emerging markets moved from bank face the same constraints in the international debt loans to bond financing; they also moved from market. Indeed, some advanced economies issue floating-rate to fixed-rate instruments (Figure 3). local-currency debt in their home markets and attract Currently, floating-rate bonds make up less than 5 international investors to purchase it there. percent of the EMBIG. Most international sovereign debt of emerging market countries is issued at medium-term (5–10 2Certain types of short-term debt that have been widely cited as a source of fragility in some recent crises, such as the Mexican years) or longer-term maturities. However, the aver- Tesobonos in 1994 and the Russian GKOs in 1998, were issued age maturity of emerging market countries’ debt has domestically and, hence, were not international debt in the sense declined in recent years, and is now lower than for used here. 8 ©International Monetary Fund. Not for Redistribution Public Debt in Emerging Market Countries Versus Advanced Economies short-term fixed-rate, floating-rate (indexed to a do- Figure 4. Structure of Internationally Issued mestic rate), inflation-indexed, and foreign-currency. Debt: Maturity Composition Each of the first four categories represents more than one-half of total debt in at least one country. There is also significant heterogeneity within regions. In Asia, >20 years 10–20 years 5–10 years <5 years for example, some issuers (Indonesia and Malaysia) 160 do not make use of long-term local-currency debt Emerging Market Countries: whereas other issuers (India, Taiwan Province of Remaining Maturity Structure China) rely almost exclusively on this form of debt. 120 of the EMBIG1 (In percent) In Latin America, some countries (Venezuela) borrow mainly through interest-rate-indexed debt, whereas in 80 others (Chile) the majority of government debt is in- dexed to inflation. 40 A Consolidated View 0 1994 96 98 2000 02 Domestic and international debt markets are sub- stitute sources of finance and should be considered 14 jointly. International and domestic debt markets have Average Maturity at Issue become integrated, with residents and nonresidents of Sovereign Debt Issues 12 (In years) being active in both. For example, in both Argentina and Uruguay, more than half of the international Advanced economies 10 debt was held by residents. Conversely, foreign resi- dents held more than 80 percent of Mexican domes- 8 tically issued Tesobonos and Cetes before the 1994 crisis (IMF, 1995) and a large share of Russian 6 GKOs and OFZs issued before the 1998 crisis (about Emerging market countries 30 percent, according to IMF staff estimates). Sover- 4 eigns seem able to choose whether to tap interna- 1980 84 88 92 96 2000 02 tional debt markets or domestic debt markets. In ad- Sources: JPMorgan, Emerging Market Bond Index Global dition to market conditions, this choice depends on (EMBIG); Capital Data, Bondware and Loanware. two sets of considerations. First, domestic public 1Percentages in first three years do not add up to 100 because debt is likely to crowd out financing to the domestic of instruments with unknown remaining maturity. private sector, because some firms may be con- strained to the domestic credit market owing to high costs of borrowing abroad. Second, international in- vestors are less protected in domestic jurisdictions. Structure of Domestic Debt Obtaining an integrated picture of debt structure that includes both domestic and international debt is The composition of government debt issued on difficult owing to data limitations, especially for do- the domestic market is much more heterogeneous mestic debt. Since the 1994 Mexican crisis, the in- across countries than is the composition of debt is- ternational community has made an effort to im- sued internationally. While there are differences be- prove the availability of cross-country statistics.3 tween emerging market countries and advanced This effort has focused primarily on external debt, in economies, these are overwhelmed by differences spite of the important role played by domestic debt among emerging markets. On average, emerging in several recent emerging market crises (Mexico in market countries rely on long-term local-currency 1994; Russia in 1998; and Brazil in 1998). Neverthe- debt to a lesser extent than do advanced economies, less, it is possible to establish some basic stylized but there is substantial variation among emerging facts on total (domestic plus international) govern- markets: such debt is virtually absent in Latin Amer- ment debt.