Document Type: 
Document Number (FOIA) /ESDN (CREST): 
Release Decision: 
Original Classification: 
Document Page Count: 
Document Creation Date: 
December 22, 2016
Document Release Date: 
March 15, 2007
Sequence Number: 
Case Number: 
Publication Date: 
August 1, 1982
Content Type: 
PDF icon CIA-RDP84B00049R001102640013-2.pdf455.67 KB
Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640013-2 Rescheduling Sperms John Calverley American Express International Banking Corporation How the Cash Flow Crisis Floored the LDCs When the supranational agencies monitored the debts of developing countries, they overlooked the LDCs' sudden switch to short-term financing. Here's an analysis of the real plight of the LOCs - measured, not by debt-service ratios, but by cash flows When the capital markets are functioning smoothly and a sovereign borrower is perceived as a good risk, banks compete to lend. Bankers compare the assessment of risk provided by their country-risk analysts and the trends in the economic and political situation with the returns they are earning. But when these trends deteriorate sharply, often due to a shock, such as an increase in oil prices or political upset, the focus of attention shifts. Fundamental economic and political factors remain important and the usual issues, such as raw material resources, export growth potential, debt burden and political stability, are carefully reassessed. But the crucial shift is that attention is suddenly focused on cash flow and liquidity. Countries are eventually forced to reschedule when their foreign exchange cash flow has deteriorated so far that avail- able liquidity is not enough to meet commitments. This hap- pens ultimately because fundamental country risk problems become too great. But it can also happen, and may catch banks by surprise, if the cash (low position is particularly vulnerable. If banks are unwilling to extend further credit when a country runs into difficulties, there follows a difficult process of adjust- ment, usually with IMF support and guidance, and a reschedul- ing of private and official debt. The level of debt in many countries now is such that debt servicing is a major component of the balance of payments. Banks' willingness to continue lending depends increasingly on countries' abilities to manage such debt. While this rests ulti- mately on nations' overall economic and political health, high levels of debt bring increasingly large cash flows which require careful monitoring and control. Current high interest rates are a major burden; but as much of the debt built up in the 1970s is now falling due, amortization payments also are becoming substantial. There are signs already that the growth of batik lending to LDCs is slowing down. Medium and long-term debt out- standing grew 24.6% a year from 1975 to 1979 and then slowed to 14.4% in 1979/81, a fall offset only partly by rising short- term debt. A few well-publicized reschedulings, high debt bur- dens in some countries and prudential considerations, with many banks holding sizeable LDC portfolios, could bring a further slowdown in lending. But this does not mean that total debt will stop growing. The total debt of developing countries is certain to be close to $ I trillion by 1986. Nor does it mean that the annual debt servicing requirements of many developing countries will stop increas- ing. In 1986 banks may receive debt service payments of $156 billion compared with $104 billion in 1982, as well as rolling over short-term debt of at least $200 billion. It t--. though, that the net flow of funds from banks to developing countries will fall, v even become negative, as countries repay more inirtterest and amortization than they raise' in new loans. A net flow back to banks would be a fundamental change of direction. In the last five years, banks provided a net flow of around $10 billion each year to developing countries. Without this, many countries would have suffered from lower economic growth in the face of oil price jumps and the slow-down in world trade growth. During the next few years the LDC current account deficit will remain high but an increasing proportion will he interest payments. Maintaining a net inflow of development funds from the banks will require an improvement in world conditions, which have been particularly harsh in 1982: low commodity prices, stagnant world trade growth and high interest rates have made life difficult for I PCs. But also required is high-quality debt management to maintain a viable maturity schedule and con- trol the enormous cash flows that are involved. Short-term debt has boosted the total The debt position at end-1981: Medium-term debt out- standing from private sources grew at 20% a year from 1976 to 198 1, slowing to 15% in the last two years but taking the total to $309 billion. At the same time debt from official sources grew more slowly, averaging 15.2% a year, bringing total medium and long-term debt of developing countries (based on World Bank data) to $489 billion at end-1981. A total of $140 billion in short-term debt, calculated from Bank of International Settle- ments data, takes the overall total of developing country debt to $629 billion at end-1981. The OECD secretariat, drawing on other sources as well as the World Bank's debtor reporting system, arrives at a figure for medium-term debt about $30 billion higher. Some of the debt to banks is partly or wholly guaranteed by export credit agencies such as ECGD. Estimates for end- 1981 by OECD indicate that if export credits are excluded, bank loans over one year stood at $172 billion or about 56% of the total outstanding. Calculations with the short-term debt included give a total bank exposure to developing country risks of $307 billion, compared with $82 billion at end-1975. Developing country reserves at end-198l stood at $106 billion, according to IMF data - equal, on average, to 2.5 months of import coverage. Total deposits with banks by gov- ernments and residents of these countries stood at $204 billion at end-1981, but many of these belong to residents and are not Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640013-2 O CD CA O ?1 necessarily available to the central bank. Debt projections to 1986: The charts show the way borrow- ing requirements and debt levels could develop over the next five years. They show what will happen if the increased caution evident in bank lending in recent months, prevails. Gross bor- rowing from the banks remains steady in 1982 and 1983 then resumes its rise in 1984, reaching a total of $127 billion in 1986 which, with a projected total of $300 billion in official debt, brings the overall total to $954 billion. But the growth in private debt is much slower than before: only 8% a year, compared with 18% in the four years to 1981. Moreover when the net flow from banks to developing countries is calculated - that is, taking net borrowing plus interest receipts on official deposits held with the banks, minus interest costs - a striking result emerges. After five years of positive flow to the developing countries averaging $10.5 bil- lion a year, the flow turns negative. In the five years 1982/86 banks would receive a net inflow from developing countries averaging $12 billion a year. Brighter times ahead - perhaps These projections were obtained using a computer model (the Amex private capital market model) to simulate the impli- cations for the capital markets of a set of assumptions on trade, official financing and interest rates. The assumptions in this simulation could be optimistic: the trade deficit of developing countries is expected to fall in 1983 as world trade recovers and commodity prices move up, while tight control of imports by a number of countries continues; oil prices are assumed to stay constant in real terms, which implies a rise in the import bills for some countries. The effect of an oil price rise in this simulation is muted by the inclusion of several key oil exporters, notably Indonesia, Mexico, Nigeria and Venezuela. This is breaking with the com- mon practice of considering non-oil producing developing countries and oil exporting countries separately, but that dis- tinction is looking less useful. The sodden, unexpected rnter- gence or an all glut in 1981 left seve, ? or oil es Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640013-2 ? curumuney ? August 1902 Debt keeps rising ... Total Debt 1000 se ll (All I DCs) Total debt 800 Privet short-term debt (Under I year) 4 . 600 r y;t.-,.t ~_.' aka .t S 400 1 /', Private medium-term debt; sr ' 1 L !- 4 1~ '.~ ? i f Y.i ~J ?~' 200 Official debt 1976 78 80 82 84 86 0 ~- --- Forecast . ? ? so does bank lending . . . Gross Private Borrowing (Hollrncin-' frr,m ctonlnlclr.ial hanks) . ? . and the cost. Spreads Over LIBOR 20 Geo ra hi cal 9 20 P `> II, xl ,,I rrxk'? to' oIII xini ey, t ,sixx)11M?'. In piffled Nations rrx)ex of 80 ryx ~rnrt ,milli of lkveklperd uxxltrres exfxx t5 of rnanufacttxes l~ I 1 I I I I I I I 1~ I~~T 1 1 t ill ,I r 1978 77 78 79 80 81 82 rage, be able to grow faster. But these projections do not mea that a slow-down in growth is inevitable. Much of the borrow ing in recent years has been needed to offset higher oil prices. I the debt burden is stabilized in coming years, future shocks w?i be more readily accommodated by the banks. Cash flow analysis: A cash-flow approach to the analysis c debt servicing capability is increasingly important. Analysis t the flow captures a greater amount of payment than the trad ? tional debt service ratio. Repayments of medium-term ban debt by developing countries are expected to total $44 billion i i 1982, compared with S21 billion in 1977. But the growth I f short-term debt in the last few years, spectacular in 1979 ar; 1980, means that in 1982 LDCs need to repay or roll over SIt i billion, about three times the medium-term figure. When inte ? Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640013-2 Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640013-2 ... and cash dries up. 60 USSbn interest receipts on Flows Cash reserves 20 (All Ll)t.'s) so 40 M t m9 III1: a medium-term debt so - 120 Interest payments 160 1976 77 78 79 80 81 82 83 84 85 86 k., ,cast ---- -- ..J So,ace Ame. Bj,A,P,rvdte Cd{Ltdl Ma,ket Mudd est payments are added - approximately $48 billion on medium-term debt plus S12 billion on short debt and $44 billion in amortization of medium-term debt - the total payments reach $244 billion. The traditional debt service ratio includes only the service on medium and long-term debt - $92 billion in 1982. The IMF now includes interest on short-term debt in its calculation, bringing the total to $104 billion. This is fewer than half the total payments due, although much of the short-term debt is trade related, normally easily refinanced. But countries often borrow more short term when medium-terns finance is difficult to raise: this must be watched carefully. Latest data from the Bank for International Settlements for the second half of 1981 suggest that some countries are reaching this position. Total cash flow repayments to the banks have risen faster than suggested by conventional measures. Measured against exports of goods and services, for example, the ordinary debt service ratio has increased from 16010 to 19'o between 1977 and 1981 while the total debt service ratio moved from 32019 to 50010. It's the fundamentals that are all-important Fundamental country risk analysis is still very important when a country runs into difficulties, because if banks remain confident about the medium-term situation they will continue to lend and the cash flow position will remain manageable. In Korea during 1980 something similar to this occurred. After the assassination of President Park, the political unrest and uncer- tainty coupled with the effects on inflation and the balance of payments of the second oil price rise led banks to carefully reassess their lending. Most of them judged that the fundamen- tals were still sound and they were prepared to continue lend- ing. Hence the government, although careful to borrow modestly on the syndicated credit markets, was able to finance the substantial current account deficit without great difficulty. Other countries have been less fortunate. Banks have been unwilling to continue to lend in a deteriorating situation. Some- times when a country begins to run into difficulties, lenders may restrict credit to short-term maturities, preferring not to make a long-term commitment in the r r uncertaint c. will not show up in the traditional debt service ratio but, because of the bunching effect on repayments, it can trigger off a debt crisis. Table 1 See How It Grows Developing countries' debt position 1976-81 1976 1981 (S billion) Medium + long-term outstanding 212 489 of which private sources 124 309 of which hank loans other than export credits Short term (under one year) to banks 39 1402 Total debt outstanding .251 629 Committed but undisbursed debt 74 110' Reserves Deposits with banks 88 211' Total reserves minus gold 59 106' Debt Service Amortization on medium and long-term debt Private Sources 16 40' Official Sources 4 94 Interest payments on medium and long-term debt Private Sources 7 36' Official Sources 3 7' Interest payments on short-term debt Debt service ratio (including interest on short-term debt) Sources.- 'OECD, Bank for International Settlements ' IMF Estimate based on World Bank data Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640013-2 Q Approved For Release 2009/04/01 : CIA-RDP84B00049RO01102640013-2 a August 1292 The position of individual countries is shown in Table 2,in the older of debt outstanding to the banks. Several measures of debt and debt burden are presented as well as cash flow indica- tors. The potential importance of cash flow measures can be illustrated with a few examples where they give a different picture to the other measures. Comparing Chile with Colom- bia, for example, it is clear that Chile, with a debt service ratio of 45016 and a net debt to current account receipts of 90%. has a higher debt burden than Colombia which has ratios of 12% and 22% respectively. Yet the cash flow indicator (column 7), show- ing total payments due as a percentage of current account receipts, gives almost the same value - 64% for Chile and 59% for Colombia. The telling indicators Another example is Argentina which has a debt service ratio almost half that of Mexico but the cash flow indicators are the same. In 1981, both countries needed to make interest payments on medium-term debt or to roll over short debt almost to the same sum in relation to their current account receipts. Turkey, the only country in the table to have recently rescheduled much of its debt, has an ordinary debt service ratio of 17% while the cash flow ratio is only slightly higher at 23%. Net flows from banks vary substantially between coun- tries. The flow is calculated as the net increase in debt to banks, plus interest receipts on reserves, minus interest payments on bank debt. The flow is shown in column 9 as a percentage of initial bank debt. Mexico, for example, borrowed $14.4 billion net of amortization in 1981 and, after net interest payments of an estimated $6 billion, received a net inflow of $8.4 billion, a flow of 19.8% as a proportion of debt at end-1980. But most countries received smaller net flow and several made net payments to the banks. Malaysia received the largest inflow, 67% in relation to original debt, but from a very low base. Egypt received the next largest inflow, 38%, and Chile was in third place. Brazil, for several years one of the key borrowers in the Eurotnarkets, received only a 3.2% inflow in 1981; without interest receipts the inflow would have been virtually eliminated. The largest net outflow was recorded for Turkey and reflects both the caution of banks after the rescheduling, and the improvement during the year in the balance of payments. Algeria and Ivory Coast also recorded net outflows to the banks. LI Table 2 Who Owes What Among the Developing Countries LDC debt and cash flow 1981 - major borrowers 1 2 3 4 5 Total bank debt Net bank debt Short term bank Debt service on medium Debt service ratio S billion Current account receipts % debt S billion term S billion % Mexico 56.9 147 24.0 12.2 60.0 Brazil 52.7 176 14.3 16.0 58.0 Venezuela 26.2 25 14.4 6.8 37.0 Argentina 24.8 140 9.9 3.6 27.0 Korea 19.9 58 10.6 4.0 16.0 Yugoslavia 10.7 38 2.3 0.9 20.0 Chile 10.5 90 3.6 2.5 45.0 Philippines 10.2 76 5.4 2.0 24.0 Algeria 8.4 27 0.7 4.6 36.0 Indonesia 7.2 - 2.5 2.7 12.0 Taiwan 6.6 - 3.7 1.6 6.0 Israel 6.0 - 4.0 1.2 8.3 Nigeria 6.0 19 1.8 1.1 4.0 Colombia 5.4 22 2.3 0.8 12.0 Thailand 5.1 36. 2.8 1.4 17.0 Ecuador 4.5 122 1.9 0.6 22.0 Turkey 4.2 27 0.8 1.4 17.0 Malaysia 4.4 07 1.2 0.5 5.0 Egypt 4.4 - 2.9 2.0 20.0 Peru 4.4 63 2.3 2.1 42.0 Morocco 3.7 71 1.0 1.6 35.0 Ivory Coast 3.2 78 0.7 1.0 39.0 6 Total payments due 7 Total payments _ due Current account receipts 8 Estimated net now from banks1981 9 As% bank debt 1981 $ billion % S billion % 29.2 97 8.4 19.8 30.9 114 1.5 3.2 19.9 77 1.2 4.9 12.0 93 3.2 16.1 12.9 46 1.1 6.8 3.4 16 0.2 1.7 4.6 64 2.8 37.9 6.6 77 0.2 2.2 5.5 32 -1.8 -20.0 5.2 22 0.7 11.6 5.2 20 1.2 22.0 4.8 32 1.2 23.9 2.6 11 0.9 20.0 2.9 59 0.7 14.4 4.3 46 0.8 20.0 2.4 80 0.2 6.3 1.7 23 -0.7 -17.5 1.6 10 1.8 67.2 4.0 38 1.3 38.4 3.3 79 -0.1 - 1.5 2.8 66 -0.1 - 2.9 1.6 49 - 0.2 -6.7 Net bank debt: assets minus liabilities of banks reporting to BIS; negative net bank debt; short-term bank debt: debt with original maturity under one year; total payments: calculated as debt service on medium-term debt plus estimated interest on short-term debt, plus rollovers of short term debt; net flow from banks: calculated as increase in debt reported to BIS minus estimated net interest payments. Sourcrrl clank for International Settlements (columns 1,2,3), oa~cn 14.1), Amex Bank estimates (6,7,8). Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640013-2