Do developing economies have an external debt problem?
|- External debt in the developing world has risen markedly in recent years and currently exceeds $11 trillion. Although many developing economies have experienced strong rates of economic growth, GDP has not kept up with external debt in many cases.
- In this report, we develop a framework based on a number of indicators to evaluate the viability of a country's external debt position. We then use this framework to provide a sense for which developing countries could potentially be at risk of an external debt crisis.
- Economies in our 25-country sample that appear to be most vulnerable at the present time include Argentina, Chile, Indonesia, Turkey and Venezuela.
- At the other end of the spectrum, Hungary, Malaysia, Saudi Arabia, South Korea and Thailand appear to be less vulnerable. There are 15 countries with intermediate degrees of vulnerability.
- Although we are not suggesting that a wave of external debt crises in the developing world is necessarily imminent, we would expect that any crises that do occur would be more likely in countries that our framework characterizes as "highly vulnerable" than in countries that we determine have "low vulnerability."
External Debt in the Developing World Has Risen Considerably in Recent Years
Most forecasters, including us, look for global economic growth to strengthen significantly over the course of the year as many economies emerge from the pandemic. Specifically, we forecast global GDP will grow in excess of 6% in 2021 which, if realized, would be the strongest year of global economic growth in at least 40 years. (See our International Economic Outlook for details.) We look for this momentum to carry into next year, with a forecasted GDP growth rate of roughly 4% in 2022.
But in an 11-part series of reports we wrote in January and February, we discussed a number of factors which impart some risk to that sanguine outlook. We did not include the external debt situation in many developing countries in that initial list of risks, but its inclusion may have been warranted. In this first report in a two-part series, we will examine external debt in a sample of 25 large developing economies to determine which countries may have a “problem.” In a forthcoming follow-up report, we will analyze which creditor countries could be adversely affected if developing economies are unable to service their debts.
By definition, external debt is the amount of debt that the household, business and public sectors in a country owe to foreign creditors, regardless of currency. For example, a corporation that is domiciled in Peru could issue bonds that are denominated in U.S. dollars. If foreigners buy these bonds, the amount of their purchases are classified as Peruvian external debt. If that corporation also issued bonds that were denominated in Peruvian soles and foreign investors bought those bonds, then the amount of those purchases would also be included in Peruvian external debt. But the dollar-denominated corporate bonds that are owned by Peruvian residents would be not included in Peruvian external debt.
As shown in Figure 1, the aggregate amount of external debt among 62 developing economies for which the Institute of International Finance has data has grown to more than $11 trillion last year from nearly $2 trillion in 2000. Excluding China—data on Chinese external debt are not available until 2014—the external debt of the remaining 61 economies totaled $8.7 trillion in 2020. Of course, the size of many developing economies has also grown significantly over the past two decades, so external debt needs to be scaled by GDP. But even accounting for the significant rise in GDP in the developing world, the aggregate external debt-to-GDP ratio, excluding China, has risen markedly over the past decade (Figure 2). Although we do not have data extending back to the 1990s for all the countries in our sample, it appears that the aggregate external debt-to-GDP ratio is higher today than it was in the mid-1990s, before a tsunami of financial and economic crises swept through the developing world.
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