While the share of low-income countries at high risk fell by almost half between 2007 and 2013, debt vulnerability has actually increased in the past two years (see Chart 1).
According to the report, which looks at 74 low-income countries, public debt trends have changed significantly over the past decade. Debt relief programs, strong growth, and high demand for commodities, drove the average debt-to-GDP ratio down from 66 percent in 2006 to around 48 percent at end-2014 (see Chart 2).
The changing financing landscape, pros and cons
Good macroeconomic performance in many low-income countries—especially frontier-market economies—helped expand their financing sources through increased access to external markets. The study shows the share of non-concessional to total external debt broadly doubled between 2007 and 2014 for frontier-market economies and commodity exporters (see Chart 3).
Moreover, of the 74 countries covered by this report, 13 issued Eurobonds during 2010–14, with each market issue providing average financing equivalent to 3.2 percent of GDP (see Chart 4). And analysis suggests that low-income countries’ bond issuances have been mainly driven by greater economic development, although ample global liquidity has also helped.
The study also shows that issuance of Eurobonds is generally not associated with a near term loosening of fiscal policy. Thus, issuers substitute bond proceeds for other forms of financing, rather than increase expenditure in the short run. At the same time, access to international capital markets appears to reduce financing constraints, providing countries with more flexibility to conduct discretionary fiscal policy.
Borrowing from domestic markets is also on the rise, most importantly in frontier markets. For these countries, domestic public debt increased from 14 to 19 percent of GDP from 2007 to 2014, compared to a stable ratio of 13 percent of GDP for the average low-income country. Non-resident investors are showing increased interest in domestic debt markets in some frontier markets.
The report says domestic borrowing avoids currency risk, and is typically more predictable than overseas borrowing. For many countries, it appears to be associated with financial deepening and economic...