Public Information Notice: Debt- and Reserve-Related Indicators of External Vulnerability

May 19, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 1, 2000, the Executive Board held a seminar on debt- and reserve-related indicators of external vulnerability.

Executive Directors welcomed the opportunity to discuss debt- and reserve-related indicators of external vulnerability as part of their ongoing consideration of issues relating to debt and reserve management and crisis prevention. Directors considered these and other quantitative indicators to be important tools for strengthening the analysis of vulnerability and for indicating the need for adjustment in macroeconomic and prudential policies by providing an aid to structured and more systematic discussion of individual cases. They agreed that the Fund should continue to develop and refine its work in this area.

At the same time, Directors cautioned that indicators are just a starting point for analysis, that exclusive reliance on single indicators is unwise, and that any indicator or set of indicators must be interpreted carefully in the context of a complete analysis of a country's external and overall macroeconomic prospects. Directors emphasized that staff should be fully attentive to these qualifications in incorporating the results of ongoing work on indicators in refining and systematizing the analysis in Article IV consultation reports. Given the potential for such indicators to mislead or be misinterpreted if taken out of context, several Directors urged caution regarding their potential public dissemination.

With regard to reserve-related measures, most Directors supported the staff's view that the ratio of reserves to short-term debt could be a particularly useful indicator of reserve adequacy, especially for countries with significant, but not fully certain, access to international capital markets. While there were some grounds for using a one-to-one ratio for this indicator as a benchmark in such countries, in general Directors considered that this should be regarded, at the most, as only an "amber light," suggesting the need for further investigation. They underscored that judgments as to reserve adequacy based on indicators should take full account of country-specific factors. Among such factors, Directors stressed the importance of the choice of exchange rate regime and the flexibility of domestic interest rates; the regulatory regime and incentive structure within which the private sector operates, including with regard to bank supervision and corporate governance; as well as the extent to which debt is denominated in local currency, hedged, or offset by additional private sector external assets and foreign currency cash flows.

More broadly, Directors agreed that the analysis of vulnerability needed to take into account other potential sources of short-term demand for reserves, including the potential for capital flight, derivatives exposures, and short-term public debt to residents. They considered that stress tests could be a useful supplementary tool to take such factors into account. Directors also agreed that more traditional reserve-related indicators, such as the ratios of reserves to imports and to broad money, could convey useful information under certain circumstances and should be retained.

While recognizing that debt-related indicators are best used in the context of medium-term scenarios and from a dynamic perspective, rather than as snapshot measures, Directors agreed on the importance of such indicators and requested the staff to continue using them systematically in its work. Directors also urged the staff to pay close attention to the currency composition, maturity, interest rate, and other terms of external debt in its analyses of vulnerability, taking into account derivatives exposures, as well as the positions of the various sectors of the economy. In that context, Directors welcomed the detailed discussion of sectoral indicators. They agreed that it was important to obtain more adequate information on the financial and nonfinancial corporate sectors, and noted the scarcity of aggregate information in this area for most countries. Recognizing the potential costs of data collection to the ultimate providers and to compilers of data, Directors urged both the staff and member governments to take full advantage of information on individual banks and companies made available through securities regulatory bodies and other sources. To access such information efficiently, Directors encouraged staff to work with the World Bank and draw upon existing proprietary databases.

Directors recognized the benefits of further improvements in the availability and comparability of data. In this context, they noted the importance of the new standards already agreed upon for data on reserves and external debt under the Special Data Dissemination Standard (SDDS) and General Data Dissemination System (GDDS), which should help to provide comprehensive and comparable measures of reserves and external debt—including short-term debt and its sectoral composition. At the same time, Directors expressed concern at the increasing demands and costs being placed on statistical agencies, and several stressed that these demands should not be increased further. Directors also agreed that improvements in creditor-side data sources had a major role to play in strengthening the analysis of external vulnerability, but urged caution in the use of data from such sources as this data had been created for other purposes.

Directors encouraged staff to integrate the analysis developed in the staff paper and the results of today's discussion in the development of debt management guidelines for Board consideration in the very near future. More broadly, Directors considered that these should be drawn upon in the refinement of the Fund's internal working procedures and guidance on the assessment of external vulnerability.

A paper, "Debt- and Reserve-Related Indicators of External Vulnerability," will be posted on the IMF's external website.


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