## ppea2020003

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### EXECUTIVE SUMMARY — Overview
- Public debt in lower-income economies (LIEs) has risen in recent years, with half of the countries covered in this report now assessed to be at high risk of or already in debt distress.
- The pace of debt accumulation has slowed somewhat since 2017, helped by gradual recovery in oil-exporting LIEs.
- Debt-to-GDP ratios have continued to rise in non-oil exporting LIEs, reflecting increased commercial borrowing, which worsened interest-growth differentials, and large primary deficits.
- Accommodative global financial conditions and expanded funding from non-Paris Club creditors have allowed LIEs to mobilize larger volumes of external financing.
- Expanded access to credit has provided opportunities for borrower countries to accelerate development, provided that the additional funding is used effectively.
- Increased reliance on funding on commercial or near-commercial terms has raised exposure of LIEs to interest rate, exchange rate, and rollover risks.
- The increasingly diverse creditor base and types of debt instruments used can complicate (and lengthen) the process of debt restructuring, where such restructuring is needed.
- Rising debt servicing costs, now at multi-year highs, are diminishing already constricted fiscal space.

### Debt Trends and Vulnerabilities
- Staffs’ projections point to a gradual decline in debt levels over the next five years, but these projections are in many cases dependent on ambitious fiscal adjustment and growth assumptions.
- Downside risks to the projections include potentially weaker global growth and rising protectionism, which would reduce demand for LIEs’ exports.
- Important gaps remain in debt management and debt data transparency.
- World Bank evaluations point to some improvement in debt management strategies; several LIEs have expanded debt coverage to include guarantees and contingent liabilities and have improved public debt reporting.
- Many countries still have much to do in expanding the coverage of public sector debt data and in improving debt management governance.
- The multi-pronged approach (MPA) provides a framework for the IMF and the World Bank to help LIEs address debt vulnerabilities and close these gaps.

### Key Findings and Statistics
- The median public debt-to-GDP ratio for LIEs as a group is projected at 49 percent of GDP in 2019, down by 2 percentage points from 2017.
- The public debt-to-GDP ratio is expected to have risen in 49 of 76 LIEs and in 41 of 59 LIDCs.
- Thirteen countries are estimated to achieve debt reductions of more than 5 percentage points of GDP between 2017 and 2019.
- Public debt ratios are estimated to have increased by more than 5 percentage points in 20 countries.
- The average interest to revenue ratio is expected to rise to 8.7 percent in 2019, up by 0.9 percentage points in 2017, extending the rise from 6.3 percent in 2013.
- Frontier economies saw an increase in interest burdens between 2017 and 2019 of 1.9 percentage points.
- Debt service burdens are on average highest in sub-Saharan African countries; debt service burdens have eased somewhat for countries in the Middle East and North Africa (MENA)/Central Asia following an earlier runup through 2016.

### Drivers and Risks
- Growth-friendly improvements (e.g., firming international oil prices, recovering real exchange rates, gradual fiscal consolidation, and debt restructuring) contributed to declines in public debt-to-GDP for fuel exporters (examples cited include Chad and Republic of Congo).
- Increased commercial borrowing has worsened interest-growth differentials in non-oil exporters.
- Wider and more commercial creditor base increases susceptibility to interest rate, exchange rate, and rollover risks and can complicate debt restructuring.
- Projections of declining debt depend on ambitious fiscal adjustment and growth assumptions; weaker global growth and rising protectionism present downside risks.

### Debt Management, Transparency, and Institutional Gaps
- Some improvement in debt management strategies has been observed, and several countries have expanded debt coverage to include guarantees and contingent liabilities.
- Many countries still need to expand public sector debt coverage and improve debt management governance.
- The MPA offers the IMF and World Bank a coordinated framework to help LIEs address vulnerabilities and close gaps in debt management and transparency.

### Policy Priorities and Recommendations (Executive Summary)
- Countries should mobilize additional domestic revenues.
- Improve spending efficiency and public investment management.
- Strengthen debt management and governance.
- Create fiscal space to implement countercyclical fiscal policy in the face of shocks.
- Official creditors should adhere to sustainable financing practices that pay appropriate attention to maintaining debt sustainability in borrower countries, including by providing financing on more concessional terms, to help borrowers meet development objectives while maintaining debt sustainability.
- Higher inflows of ODA, coupled with efforts to boost domestic revenue mobilization, attract more foreign direct investment, and improve spending efficiency, can ease the trade-off between scaling up public investment and containing debt vulnerabilities, though the fundamental tension will likely remain in many LIEs.

### BOX 1 — Debt Developments after HIPC/MDRI Debt Relief: Key Points
- Interest-to-revenue ratios on external debt have risen in half of HIPC/MDRI recipient countries to levels above the pre-HIPC Completion Point level.
- Ghana: interest-to-revenue ratio for 2018 is up by around 15 percentage points from that observed three years before the country’s HIPC/MDRI completion point.
- Zambia: interest-to-revenue ratio for 2018 is up by around 10 percentage points from that observed three years before the country’s HIPC/MDRI completion point.
- 20 percent of HIPC/MDRI recipients have public debt-to-GDP ratios larger than those observed one year before the HIPC completion/MDRI point.
- GDP per capita (measured in constant U.S. dollars) in HIPC/MDRI countries increased by a median of 30 percent between the year before the completion point and 2018.
- Absolute poverty rate in HIPC/MDRI countries fell from a median of 53 percent one year before the completion point to a median of 41 percent in 2018.
- Fiscal deficits have been a key source of debt accumulation in all country groups except small states.
- Real interest-growth differential in LIEs has been on a rising trend, narrowing the historically negative differential.
- Reported median total external SOE debt for LIEs is 0.3 percent of GDP (IDS data), but reporting is likely incomplete; examples: Zambia 4.5 percent of GDP and Ghana 1.3 percent of GDP as reported in DSAs.
- PPP-related contingent liabilities have continued to rise; Ghana, Lao PDR, and Honduras together accounted for almost half of total cumulative PPP investments in LIEs over 2013–18.
- Half of LIEs for which Bank-Fund staff use the LIC DSF are assessed at high risk of external debt distress or already in debt distress.
- For the LIDC group, 44 percent of countries are at high risk or in debt distress.
- Ten countries assessed to be “in debt distress” as of end-2019: Eritrea, the Gambia, Grenada, Mozambique, the Republic of Congo, Somalia, Sao Tome and Principe, Sudan, South Sudan, and Zimbabwe.
- Median public debt in frontier economies rose to 65 percent of GDP in 2019 from 60 percent of GDP in 2015.

### BOX 2 — Perspective on Horn, Reinhart and Trebesch (2019) and Financing Patterns
- World Bank IDS indicates China’s share of LIEs’ total public external debt grew from an average of 4 percent in 2008 to 17 percent in 2018.
- HRT (2019) findings summarized:
  - HRT argue “hidden debt” equals 50 percent of total Chinese overseas lending and averages 40 percent of total external debt of the 50 top-recipient countries.
  - HRT suggest “hidden debt” exceeds 10 percent of GDP in 12 countries and 5 percent of GDP in another 13 countries.
- Two methodological issues noted with HRT:
  - HRT estimate “hidden debt” using adjusted loan commitments rather than debt outstanding and disbursed, which could lead to overestimation.
  - Classification of debt as PPG debt may be incorrect: debt to Chinese entities could be investment financing not guaranteed by the government.
- Benchmarking of 14 top borrowers suggests HRT estimates are larger than an upper bound constructed from DRS data in 10 countries (all with IMF program disclosure requirements), implying possible overestimation or inclusion of non-PPG debt.
- Syndicated loans remain important but declining; average maturity of syndicated loans disbursed has been relatively stable at about 7 years since 2010.
- Local currency debt financing increased:
  - Median LIE (excluding frontier economies) local currency debt reached around 12 percent of GDP in 2018–19, up from 4 percent of GDP in 2007.
  - In frontier economies, local currency debt went from around 7 to 20 percent of GDP between 2007 and 2018–19.
  - Share of local currency debt to total public debt at around 30 percent over the last decade.
- Average interest rates on external debt firmed by 78 bps to 3.3 percent between 2017 and 2018.
  - Largest increases observed among fuel exporters and frontier LIEs (158 bps and 97 bps, respectively).
- Average maturity on external debt decreased from 23 to 20.6 years between 2016 and 2018.
- Eurobond issuances nearly tripled from an average of $6 billion per annum during 2012–16 to about US$16 billion per annum in 2017–18.
- Bond issuance has risen by an average of two percentage points of GDP per annum among new entrants and larger issuers.
- Only 22 issuers among LIEs, with the top ten accounting for almost 90 percent of borrowing since 2004.
- Eurobond refinancing needs for frontier economies will rise over the next 5 years to an annual average of almost US$5 billion, up from less than US$2 billion in 2017–2018.
- Share of non-concessional loans in external public debt remained broadly unchanged from 2017, at about 57.5 percent.
- Evidence that access to international markets has often coincided with worsening debt dynamics and greater vulnerabilities: for a sample of 20 countries that accessed international bond markets for the first time after 2005, debt service to revenue ratios rose consistently.

### BOX 3 — Collateralized Debt: Definition, Examples, and Risks
- Definition: "A debt instrument is collateralized when the creditor has rights over an asset or revenue stream that allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to repay the debt."
- Forms of collateralization include escrow accounts (examples cited: Equatorial Guinea, Ghana, and Republic of Congo), pre-purchase agreements related to natural resources, commodity barter transactions (examples cited: Ghana and Republic of Congo), and collateralized repo transactions.
- Examples of resource-backed loans presented (Share of GDP External Debt):
  - Oil revenue-backed loans: Chad11   45; Republic of Congo 1/16.4  26.7
  - Mining revenue-backed loans: Democratic Republic of Congo5.4   40; Guinea 2/4.9  25.9
- Risks of collateralization:
  - Reduce budget flexibility, impair access to non-secured financing, raise the risk of debt distress, and complicate a debt restructuring.
- Recommendation: creditors and borrowers are advised to implement a multi-stage vetting process when considering collateralization.

### CONCLUSIONS AND POLICY RECOMMENDATIONS — Summary
- Public debt accumulation in LIEs has slowed since 2017 but vulnerabilities remain high; slowdown largely confined to oil-exporters.
- Half of LIEs are currently assessed to be at high risk of debt distress or in debt distress; the fraction at high risk or in debt distress is double the fraction in 2013.
- Traditional development partners continue to provide a large share of financing; commercial financing and non-Paris Club creditors, most notably China, have increasingly supplemented traditional financing.
- LIEs’ access to international capital markets has remained concentrated: 10 of the 76 countries accounting for about 85 percent of Eurobond issuances during 2017–19.
- Rising interest burdens reduce fiscal space and limit scope for countercyclical fiscal policy.
- Projected declines in public debt are predicated on ambitious fiscal consolidation and growth outcomes above historical averages over the next five years; key risks include weaker global growth, increased uncertainty, and rising protectionism.

Policy recommendations — borrowers:
- Continue to focus on raising domestic revenue.
- Increase spending efficiency, including through better prioritization and selection of projects.
- Strengthen debt management and transparency.
- For countries at high risk of debt distress, these policies are particularly important; for moderate-risk countries, policies should increase fiscal space and capacity to absorb shocks; for low-risk countries, similar policies support pursuit of the SDGs.

Policy recommendations — creditors:
- Creditors should adopt sustainable financing practices as identified in the G20 Operational Guidelines for Sustainable Financing—Diagnostic Tool (IMF and World Bank, 2019).
- Official creditors should pay appropriate attention to maintaining debt sustainability in borrower countries, including by providing financing on more concessional terms.

### Annex Figure 1 — Frontier Economies: Bond Market Pricing and Sensitivity to External Factors (figure notes and captions)
- Bond spreads for frontier issuers are highly correlated with external risk appetite (proxied by spreads for US High Yield bonds).
- The correlation with US HY spreads broke down for EM spreads in 2019. It remains high (and rising) for lower-income economies.
- Chart captions and elements referenced: Dollar Bond Spreads for Frontier Borrowers, and US High Yields (Basis points); Correlation between US HY Spreads and EM / Low-income countries (Percent); period markers include 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027.
- Individual countries are trading at big variations from their rating implied-spreads; lower-rated issuers seem to be more overvalued (Dollar Bond Spreads vs Ratings; as of October 2019).
- Domestic policy and nonresident participation can influence inflows and outflows; empirical analysis highlights the role of global factors such as oil prices and global financial conditions.
- Benefits of increased LC issuances and nonresident participation include financial deepening, reduced exchange rate risk, and improved market liquidity; risks include initially higher costs, refinancing risks, and greater transmission of global shocks.
- Country illustrations and instrument profiles include Kenya redemption profile and real interest rate differentials (chart notes reference Fund staff calculations based on the LIC-DSF).

*Source: ppea2020003.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview
- Public debt in lower-income economies (LIEs) has risen in recent years, with half of the countries covered in this report now assessed to be at high risk of or already in debt distress.
- The pace of debt accumulation has slowed somewhat since 2017, helped by gradual recovery in oil-exporting LIEs.
- Debt-to-GDP ratios have continued to rise in non-oil exporting LIEs, reflecting increased commercial borrowing, which worsened interest-growth differentials, and large primary deficits.
- Accommodative global financial conditions and expanded funding from non-Paris Club creditors have allowed LIEs to mobilize larger volumes of external financing.
- Expanded access to credit has provided opportunities for borrower countries to accelerate development, provided that the additional funding is used effectively.
- Increased reliance on funding on commercial or near-commercial terms has raised exposure of LIEs to interest rate, exchange rate, and rollover risks.
- The increasingly diverse creditor base and types of debt instruments used can complicate (and lengthen) the process of debt restructuring, where such restructuring is needed.
- Rising debt servicing costs, now at multi-year highs, are diminishing already constricted fiscal space.

### Debt Trends and Vulnerabilities
- Staffs’ projections point to a gradual decline in debt levels over the next five years, but these projections are in many cases dependent on ambitious fiscal adjustment and growth assumptions.
- There are downside risks to the projections from potentially weaker global growth and rising protectionism, which would reduce demand for LIEs’ exports.
- Important gaps with respect to debt management and debt data transparency remain.
- Evaluations by World Bank staff point to some improvement in debt management strategies in recent years; several LIEs have expanded debt coverage to include guarantees and contingent liabilities and have improved public debt reporting.
- Many countries still have much to do in expanding the coverage of public sector debt data and in improving debt management governance.
- The multi-pronged approach (MPA) provides a framework for the IMF and the World Bank to help LIEs address debt vulnerabilities and close these gaps.

### Key Findings and Statistics
- The median public debt-to-GDP ratio for LIEs as a group is projected at 49 percent of GDP in 2019, down by 2 percentage points from 2017.
- The public debt-to-GDP ratio is expected to have risen in 49 of 76 LIEs and in 41 of 59 LIDCs.
- Thirteen countries are estimated to achieve debt reductions of more than 5 percentage points of GDP between 2017 and 2019.
- Public debt ratios are estimated to have increased by more than 5 percentage points in 20 countries.
- The average interest to revenue ratio is expected to rise to 8.7 percent in 2019, up by 0.9 percentage points in 2017, extending the rise from 6.3 percent in 2013.
- Frontier economies saw an increase in interest burdens between 2017 and 2019 of 1.9 percentage points.
- Debt service burdens are on average highest in sub-Saharan African countries; debt service burdens have eased somewhat for countries in the Middle East and North Africa (MENA)/Central Asia following an earlier runup through 2016.

### Drivers and Risks
- Growth-friendly improvements (e.g., firming international oil prices, recovering real exchange rates, gradual fiscal consolidation, and debt restructuring) contributed to declines in public debt-to-GDP for fuel exporters (examples cited include Chad and Republic of Congo).
- Increased commercial borrowing has worsened interest-growth differentials in non-oil exporters.
- Wider and more commercial creditor base increases susceptibility to interest rate, exchange rate, and rollover risks and can complicate debt restructuring.
- Projections of declining debt depend on ambitious fiscal adjustment and growth assumptions; weaker global growth and rising protectionism present downside risks.

### Debt Management, Transparency, and Institutional Gaps
- Some improvement in debt management strategies has been observed, and several countries have expanded debt coverage to include guarantees and contingent liabilities.
- Many countries still need to expand public sector debt coverage and improve debt management governance.
- The MPA offers the IMF and World Bank a coordinated framework to help LIEs address vulnerabilities and close gaps in debt management and transparency.

### Policy Priorities and Recommendations
- Countries should mobilize additional domestic revenues.
- Improve spending efficiency and public investment management.
- Strengthen debt management and governance.
- Create fiscal space to implement countercyclical fiscal policy in the face of shocks.
- Official creditors should adhere to sustainable financing practices that pay appropriate attention to maintaining debt sustainability in borrower countries, including by providing financing on more concessional terms, to help borrowers meet development objectives while maintaining debt sustainability.
- Higher inflows of ODA, coupled with efforts to boost domestic revenue mobilization, attract more foreign direct investment, and improve spending efficiency, can ease the trade-off between scaling up public investment and containing debt vulnerabilities, though the fundamental tension will likely remain in many LIEs.

*Prepared by the IMF’s Strategy Policy and Review Department and the World Bank (Executive Summary, December 26, 2019).*

### Box 1. Debt Developments after HIPC/MDRI Debt Relief

### Box 1. Debt Developments after HIPC/MDRI Debt Relief

### Debt outcomes following HIPC/MDRI relief
- Interest-to-revenue ratios on external debt have risen in half of HIPC/MDRI recipient countries to levels above the pre-HIPC Completion Point level.
- Higher interest rates and increased debt stocks have contributed to higher debt service costs.
- Ghana: interest-to-revenue ratio for 2018 is up by around 15 percentage points from that observed three years before the country’s HIPC/MDRI completion point.
- Zambia: interest-to-revenue ratio for 2018 is up by around 10 percentage points from that observed three years before the country’s HIPC/MDRI completion point.
- HIPC/MDRI recipients, especially frontier economies, have filled the borrowing space created by debt relief with less concessional external loans and domestic borrowing.
- 20 percent of HIPC/MDRI recipients have public debt-to-GDP ratios larger than those observed one year before the HIPC completion/MDRI point.
- GDP per capita (measured in constant U.S. dollars) in HIPC/MDRI countries increased by a median of 30 percent between the year before the completion point and 2018.
- Absolute poverty rate in HIPC/MDRI countries fell from a median of 53 percent one year before the completion point to a median of 41 percent in 2018.

### Debt drivers and composition
- Fiscal deficits have been a key source of debt accumulation in all country groups except small states.
- For frontier economies:
  - Debt-reducing impact of economic growth is larger than for LIEs, but the contribution of interest is comparatively large due to access to more diversified financing sources and a steady increase in debt.
- Fuel exporters experienced large deficits during the 2013–14 commodity price shock; subsequent oil price improvement and fiscal adjustments helped stabilize public debt.
- Developing countries show positive residuals linked to government guarantees for investments and debt associated with PPP projects not captured in fiscal accounts.
- Small states used grants to build trust funds or revenue stabilization/natural disaster funds, contributing to positive residuals.
- Real interest-growth differential in LIEs has been on a rising trend, narrowing the historically negative differential; this partly reflects softer growth rates and rising interest costs from market borrowing, especially for frontier economies.

### SOE and contingent liabilities
- Reported median total external SOE debt for LIEs is 0.3 percent of GDP (IDS data), but reporting is likely incomplete.
- SOE debt reported in DSAs has been larger in some countries: Zambia 4.5 percent of GDP and Ghana 1.3 percent of GDP.
- Incomplete reporting on SOE debt raises concerns about hidden direct and contingent liabilities.
- PPP-related contingent liabilities have continued to rise; PPP investments in LIEs were substantial in a handful of countries, with Ghana, Lao PDR, and Honduras together accounting for almost half of total cumulative PPP investments in LIEs over 2013–18.
- Regional concentration: sub-Saharan Africa and Asia and the Pacific account for the lion’s share of total PPP investments in LIEs.

### Risk of external debt distress and ratings
- Half of LIEs for which Bank-Fund staff use the LIC DSF are assessed at high risk of external debt distress or already in debt distress.
- For the LIDC group (excluding high-income disaster-vulnerable small states and some recent PRGT graduates), 44 percent of countries are at high risk or in debt distress.
- Since 2017 there have been nine downgrades and four upgrades in LIC DSF risk ratings.
- Ten countries assessed to be “in debt distress” as of end-2019: Eritrea, the Gambia, Grenada, Mozambique, the Republic of Congo, Somalia, Sao Tome and Principe, Sudan, South Sudan, and Zimbabwe.
- Debt levels in frontier economies: median public debt rose to 65 percent of GDP in 2019 from 60 percent of GDP in 2015.
- For Bolivia, Nigeria, and Vietnam, public debt and fiscal GFN-to-GDP ratios remained below MAC DSA benchmarks under baseline and stress tests; for Mongolia, Pakistan, and Sri Lanka benchmarks were breached under the baseline, signaling high risk.

### Creditor composition and recent financing patterns
- Multilateral lending: outstanding multilateral debt grew by a percentage point of GDP between 2016 and 2018, reversing the 2010–16 decline in LIEs’ debt owed to multilaterals.
- Official bilateral lending: debt owed to Paris Club creditors continued to decline since 2016; debt owed to non-Paris Club creditors remained broadly flat after rising during 2010–16.
- World Bank IDS indicates China’s share of LIEs’ total public external debt grew from an average of 4 percent in 2008 to 17 percent in 2018.
- Commercial creditors, particularly foreign-currency bonds, have been an increasing source of financing:
  - Eurobond issuances nearly tripled from an average of $6 billion per annum during 2012–16 to about US$16 billion per annum in 2017–18.
  - Bond issuance has risen by an average of two percentage points of GDP per annum among new entrants and larger issuers.
  - Only 22 issuers among LIEs, with the top ten accounting for almost 90 percent of borrowing since 2004.
  - Foreign-currency denominated bonds have been the fastest growing source of financing for frontier LIEs, mainly in sub-Saharan Africa.
- Non-frontier LIEs with limited bond market access remain dependent on official creditors (multilaterals and non-Paris Club members).
- Commercial lending has also been available to borrowers at high risk of debt distress.

### Perspective on Horn, Reinhart and Trebesch (2019) findings
- HRT (2019) asserts Chinese lending is much higher than official datasets indicate, labeling excess as “hidden debt” that distorts sovereign debt risk assessments.
- HRT findings summarized in the source:
  - Loans provided by China to LIEs grew from an average of 4 percent of LIEs’ total public external debt in 2008 to 17 percent in 2018 (World Bank IDS).
  - HRT argue “hidden debt” equals 50 percent of total Chinese overseas lending and averages 40 percent of total external debt of the 50 top-recipient countries.
  - HRT suggest “hidden debt” exceeds 10 percent of GDP in 12 countries and 5 percent of GDP in another 13 countries.
  - HRT contend the identified “hidden debt” represents a lower-bound estimate.
- Two methodological issues highlighted:
  - HRT estimate “hidden debt” using adjusted loan commitments rather than information on debt outstanding and disbursed, which could lead to significant overestimation.
  - Classification of debt as PPG debt may be incorrect: debt to Chinese entities could be investment financing not guaranteed by the government.

*Source: Box 1. Debt Developments after HIPC/MDRI Debt Relief, ppea2020003.*

### Box 2. A Perspective on the Findings of Horn, Reinhart, and Trebesch (2019) (concluded)

### Box 2. A Perspective on the Findings of Horn, Reinhart, and Trebesch (2019) (concluded)

### Comparison of HRT estimates with DRS and LIC DSA measures
- An analysis of 14 LIEs that are top borrowers from Chinese entities suggests that any hidden debt is lower.
- Benchmarking HRT debt uses a lower and upper-bound measure of debt from China constructed using DRS data:
  - Lower bound: PPG external debt owed to China at end-2017 (the last year of HRT data).
  - Upper bound: the entirety of PPG debt external commitments from China during the period 2000–17 relative to the stock of PPG debt at end-1999 (debt stock assuming all commitments fully disbursed, and no repayment over the period).
- In 10 of these countries (all with an IMF program requiring authorities to disclose all government liabilities), the HRT debt estimates are larger than the upper bound.
  - Possible interpretations:
    - HRT estimates could have overestimated, possibly including unverified commitments.
    - Alternatively, HRT debt may include non-PPG debt (investment finance).
- Debt estimates underlying the LIC DSAs contingent liabilities scenario are larger than HRT estimates, with the exception of Djibouti.
- Notes on data and scenarios:
  - The DRS was established in 1951 as a system to capture detailed information at loan level for external borrowing of reporting countries.
  - In the LIC DSF, the contingent liabilities shock involves a one-off increase in the debt-to-GDP ratio equal to (i) a minimum starting value of 5 percent of GDP; and (ii) a tailored value reflecting additional potential shocks for portions of the public sector not included in the public debt definition used in the DSA. The debt indicators reported sum the end-2017 public and publicly-guaranteed external debt reported in LIC DSAs to the CL shock excluding the 5 percent starting value.

### Syndicated loans and commercial financing
- Syndicated loans continue to play an important, if declining, role in the financing mix.
  - Traditionally evenly split between financing investment projects and short-term trade loans.
  - Despite decline in proportion tied to investment projects, average maturity of syndicated loans disbursed has been relatively stable at about 7 years since 2010.
  - Syndicated loan flows do not exhibit portfolio-borrowing-like volatility.
  - Syndicated loans tend to be less transparent and their cost for the borrower may exceed the interest cost (the “all-in” cost includes additional fees charged by the leading bank and financial advisors; if backed by a guarantee, cost includes the indemnity fee).

### Local currency debt markets and non-resident participation
- Local currency debt financing continues to increase, especially in frontier economies:
  - Local currency debt for the median LIE (excluding frontier economies) reached around 12 percent of GDP in 2018–19, up from 4 percent of GDP in 2007.
  - In frontier economies, local currency debt went from around 7 to 20 percent of GDP between 2007 and 2018–19.
  - For LIEs overall, the local currency debt to GDP ratio has been increasing at broadly the same pace as the foreign currency debt to GDP ratio, with the share of local currency debt to total public debt at around 30 percent over the last decade.
- Maturities have lengthened in several economies:
  - Hooley and others (forthcoming) document an increase in weighted average time to maturity of sub-Saharan Africa local currency debt market from 1.75 years to 2.5 years between 2012 and 2017.
  - Ghana, Kenya and Tanzania have issued local currency bonds at maturities greater than 15 years.
  - Nigeria issued a debut 30-year naira bond in April 2019.
- Non-resident holdings of local currency debt have been gaining importance in a handful of frontier LIEs:
  - In Senegal and Ghana, foreign holdings average about one-third of domestic debt.
  - In Nigeria, as of end-2018, foreign investors held around 20 percent of all outstanding domestic debt instruments.

### Structure of debt portfolio and risks
- Share of non-concessional loans in external public debt:
  - Remained broadly unchanged from 2017, at about 57.5 percent.
- Average interest rates on external debt:
  - Firmed by 78 bps to 3.3 percent between 2017 and 2018 as the full effect of the runup of Eurobond issuances in 2017 was felt in 2018.
  - Largest increases observed among fuel exporters and frontier LIEs (158 bps and 97 bps, respectively).
- Average maturity and rollover risk:
  - Average maturity on external debt decreased from 23 to 20.6 years between 2016 and 2018.
  - Eurobond refinancing needs for frontier economies will rise over the next 5 years to an annual average of almost US$5 billion, up from less than US$2 billion in 2017–2018.
  - Of particular concern are countries where debt redemptions represent a high proportion of foreign exchange reserves.
- External debt composition and vulnerability:
  - High proportion of commercial external debt could amplify impact of external shocks.
  - Evidence that access to international markets has often coincided with worsening debt dynamics and greater vulnerabilities:
    - For a sample of 20 countries that accessed international bond markets for the first time after 2005, debt service to revenue ratios rose consistently.
    - Growth rates in the five years afterwards have typically not picked up, contributing to weaker internal debt dynamics.
- Collateralization:
  - Based on available data (excluding project finance), collateralized borrowing represented on average 20 percent of LIEs commercial borrowing undertaken over the last five years, down from an average of 32 percent in the previous five years.
  - Commodity producers can be large users of collateral (commodity assets and revenue flows easier to collateralize).
  - Comprehensive data on collateralization of official bilateral loans is not readily available; prevalence and implications have come to the fore in several countries.
  - Mihalyi, Adam and Hwang (forthcoming) identify 50 commodity-backed loans to sub-Saharan Africa (28 loans) and Latin America (22 loans).

*Box 2. A Perspective on the Findings of Horn, Reinhart, and Trebesch (2019) (concluded), THE EVOLUTION OF PUBLIC DEBT VULNERABILITIES IN LOWER INCOME ECONOMIES, INTERNATIONAL MONETARY FUND*

### Box 3. Collateralized Debt

### Box 3. Collateralized Debt

### Definition and context
- "A debt instrument is collateralized when the creditor has rights over an asset or revenue stream that allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to repay the debt."
- Collateralization is standard practice for many types of financing, especially in the private sector, such as trade and project financing.
- For commodity exporters, the most readily available collateral is the commodity itself, already produced, or expected to be produced at some future date.
- Governments also use collateral for certain types of project financing (e.g., oil exploration and production), as well as in lieu of a sovereign guarantee.

### Forms of collateralization (examples)
- Use of escrow accounts: borrower required to set aside a fraction of revenue receipts that can be used for debt service (examples cited: Equatorial Guinea, Ghana, and Republic of Congo).
- Pre-purchase agreements related to natural resources (referenced as Box Table).
- Commodity barter transactions: loan collateralized by a resource asset and repaid with raw or refined commodities (examples cited: Ghana and Republic of Congo).
- Collateralized repo transactions: sale of government securities to the lender, which the government agrees to repurchase once the loan is repaid.
- Note: "Some 'collateral-like' arrangements do not constitute granting of a security interest but have an equivalent effect. None of the international debt databases collects information on the collateralization features of loans. The information in this box is mainly based on information in IMF country reports."

### Examples of resource-backed loans (as presented)
- Share of GDP  External Debt
- Oil revenue-backed loans
  - Chad11   45
  - Republic of Congo 1/16.4  26.7
- Mining revenue-backed loans
  - Democratic Republic of Congo5.4   40
  - Guinea 2/4.9  25.9

### Developmental trade-offs and recommended practice
- Benefits:
  - Collateral can help viable projects proceed where finance might not otherwise be available.
- Risks:
  - If used on a large scale or on onerous terms, collateral can:
    - reduce budget flexibility,
    - impair access to non-secured financing,
    - raise the risk of debt distress,
    - complicate a debt restructuring (if necessary).
- Recommendation:
  - "Creditors and borrowers are advised to implement a multi-stage vetting process when considering collateralization (see IMF and World Bank, forthcoming)."

### Observations on prevalence and disclosure
- Collateralization has appeared in both bilateral official lending and commercial lending.
- Information on collateral features of loans is limited in international debt databases; primary evidence is drawn from IMF country reports.

*Source: ppea2020003 - Box 3. Collateralized Debt*

### CONCLUSIONS AND POLICY RECOMMENDATIONS

### CONCLUSIONS AND POLICY RECOMMENDATIONS

### Public debt accumulation and vulnerabilities
- The pace of public debt accumulation in LIEs has slowed since 2017 but vulnerabilities remain high.
- The slowdown was largely confined to oil-exporters who benefitted from a recovery in international oil prices and achieved some fiscal consolidation.
- Public debt in non-oil exporting LIEs has continued to rise because of large fiscal deficits and deteriorating interest-growth differentials.
- Half of LIEs are currently assessed to be at high risk of debt distress or in debt distress.
- The fraction at high risk or in debt distress is double the fraction in 2013.
- The risk of a near-term widespread debt crisis is somewhat mitigated by the current stability of commodity prices and continued accommodative international financing conditions.

### Financing sources, cost, and concentration risks
- Traditional development partners (multilateral, plurilateral and traditional bilateral creditors) continue to provide a large share of LIE financing in the form of loans and grants.
- Commercial financing (e.g., Eurobonds) and borrowing from non-Paris Club creditors, most notably China, have increasingly supplemented traditional financing.
- LIEs’ access to international capital markets has remained concentrated: 10 of the 76 countries accounting for about 85 percent of Eurobond issuances during 2017–19.
- The evolving structure of debt has driven up interest burdens and exposed countries to greater liquidity risks.
- The rising interest burden reduces fiscal space and limits the scope for countercyclical fiscal policy.
- The interest-to-revenue ratio in half of the countries that benefited from HIPC debt relief has risen above the pre-HIPC Completion point level.
- Rising debt service burden is associated with increased vulnerability to domestic and external shocks, particularly for countries that have tapped Eurobond markets and other non-concessional financing sources.

### Debt outlook, DSA realism, and risks
- Over the past two years, the projected debt trajectory has remained broadly unchanged but DSA realism tools are flagging risks ahead.
- The projected decline in public debt is predicated on ambitious fiscal consolidation and growth outcomes above historical averages over the next five years.
- Key additional risks to the public debt outlook stem from weaker-than-expected global growth, increased uncertainty and rising protectionism and trade tensions that lower commodity prices and exports.

### Trade-offs for countries with significant debt burdens
- Countries with significant debt burdens face a difficult trade-off between scaling up public investment to meet ambitious development objectives and containing debt vulnerabilities.
- Higher inflows of ODA, coupled with efforts to boost domestic revenue mobilization and attract more foreign direct investment, can ease this trade-off, but the fundamental tension will likely remain in many, if not most, LIEs.

### Debt management and transparency
- More progress in improving debt management and transparency is needed, particularly to keep up with the increasing complexity of public debt and the prevalence of large contingent liabilities.
- Improvements have been made on most dimensions of debt management, including in terms of developing and publishing debt management strategies and debt reports.
- Nevertheless, most countries do not meet minimum debt management standards and considerably more needs to be done to match the increasing complexity and volatility of debt flows, particularly in frontier economies that have tapped international debt markets.
- While coverage in Bank-Fund DSFs has been expanding, more needs to be done to expand debt coverage and limit risks from contingent liabilities, especially from government guarantees, SOEs’ debt and PPPs.
- The World Bank–IMF MPA provides a critical and comprehensive framework to help countries address debt vulnerabilities.

### Debt resolution framework concerns
- Debt resolution frameworks show worrying signs that they are not effective enough.
- The increased importance of non-traditional lenders and instruments has complicated debt resolutions.
- Recent restructurings have been drawn out and not fully effective in reducing public debt levels.
- A review of the architecture for sovereign debt resolution is needed.

### Policy recommendations — borrowers
- Borrowing countries need to:
  - Continue to focus on raising domestic revenue.
  - Increase spending efficiency, including through better prioritization and selection of projects.
  - Strengthen debt management and transparency.
- For countries at high risk of debt distress and attendant limited scope for countercyclical fiscal policy, these policies are particularly important.
- For countries at moderate risk of debt distress, policies should be geared towards increasing fiscal space and capacity to absorb shocks.
- For countries that are low risk, these same policies will be needed to help countries’ pursuit of the SDGs.

### Policy recommendations — creditors
- Creditors should adopt sustainable financing practices as identified in the G20 Operational Guidelines for Sustainable Financing—Diagnostic Tool (IMF and World Bank, 2019) to guide improvements in lending practices.
- To help borrowers avoid debt traps, official creditors should pay appropriate attention to maintaining debt sustainability in borrower countries, including by providing financing on more concessional terms.

*Source: CONCLUSIONS AND POLICY RECOMMENDATIONS, "THE EVOLUTION OF PUBLIC DEBT VULNERABILITIES IN LOWER INCOME ECONOMIES" (IMF).*

### Annex Figure 1. Frontier Economies: Bond Market Pricing and Sensitivity to External Factors

### Annex Figure 1. Frontier Economies: Bond Market Pricing and Sensitivity to External Factors

### Bond spread correlations with external risk appetite
- Bond spreads for frontier issuers are highly correlated with external risk appetite (proxied by spreads for US High Yield bonds).
- The correlation with US HY spreads broke down for EM spreads in 2019. It remains high (and rising) for lower-income economies.
- Chart elements and dates referenced:
  - Dollar Bond Spreads for Frontier Borrowers, and US High Yields (Basis points).
  - Correlation between US HY Spreads and EM / Low-income countries (Percent).
  - Period markers and labels in figures: 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027.

### Valuation versus ratings and overvaluation distribution
- Individual countries are trading at big variations from their rating implied-spreads.
- Within this sample of countries, lower-rated issuers seem to be more overvalued.
- Specific figure captions and dates:
  - Dollar Bond Spreads vs Ratings (Basis points; Ratings; as of October 2019).
  - Distribution of Countries per overvaluation (Percent; As per GDP, Q3 2019).

### Domestic policy, nonresident participation, and vulnerabilities
- Empirical findings and implications:
  - "If external factors can encourage non-resident inflows, strong domestic policies in 'good times' can discourage outflows."
  - Gosh and others (2016) using data from 53 emerging market economies argue that policies in good times (when capital is flowing in) can shape the outcome in bad times (when capital reverses).
  - Countries that allow the buildup of macroeconomic imbalances are more likely to experience a banking or currency crisis after a surge of inflows.
  - Empirical analysis for Nigeria highlights the importance of global factors such as oil prices and global financial conditions—factors that have a big weight in benchmark-index funds (Hosny forthcoming).
  - Strong domestic fundamentals are important, such as fiscal transparency (Kemoe and Zhan 2018) and institutional quality (Bae, 2012) in supporting foreign holdings of local currency debt.

- Benefits and risks of increased reliance on local currency (LC) issuances and nonresident participation:
  - Benefits:
    - LC issuances are generally associated with financial deepening (IMF and World Bank, 2015), which in turn is associated with higher growth (IMF, 2015).
    - Can reduce exchange rate risk and currency and maturity mismatches.
    - Improves capacity to respond to shocks and diversify the domestic investor base (IMF and WB 2018; IMF, WB, EBRD, OECD 2013).
    - Higher non-resident participation creates greater demand for local debt securities, boosts market liquidity, improves price discovery (Bae 2012; and Arslanalp and Tsuda 2014), and reduces long-term government bond yields (Peiris 2010; and Lu and Yakovlev 2017).
  - Risks:
    - LC financing can initially increase costs—as LC financing can be more expensive than FX borrowing (figures illustrate the historical interest rate differential and how it is expected to continue in the future).
    - Refinancing risks due to general dependence on T-bills and short-term securities (figure shows the redemption profile of Kenya).
    - Higher non-resident participation can increase the transmission of global shocks (Essers and others 2016; Ebeke and Kyobe 2015), raise external funding risks (Arslanalp and Tsuda 2014), and raise exchange rate and yield volatility (Ebeke and Lu 2015).

### Illustrative country and instrument profiles
- Kenya: Redemption Profile at end 2017 (Percent of total).
  - Chart axis labels include: 0 20 40 60 80 100 and years 2018 through 2027 with maturity buckets Short-term, Medium-term, Long-term.
- Real Interest Rate Differential in LC-FX, in LIEs vs FMs (in percentage points).
  - Sources and calculations noted as: Fund staff calculations based on the LIC-DSF.

Sources: Bloomberg, IMF WEO, Fund Staff Estimates; and referenced studies and staff work as cited in the figure notes.  

*International Monetary Fund — Annex Figure 1, "Frontier Economies: Bond Market Pricing and Sensitivity to External Factors" (figures and captions as provided).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2020/english/ppea2020003.pdf_