HOW THE CASH FLOW CRISIS FLOORED THE LDCS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001102640013-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 5
• Document Creation Date: December 22, 2016
• Document Release Date: March 15, 2007
• Sequence Number: 13
• Publication Date: August 1, 1982
• Content Type: MISC

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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
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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
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? 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 ?
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... 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
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 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).
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