Sovereign borrowing by developing countries: What determines market access?

1. Sovereign borrowing by developing countries: What determines market access? Articlewritten by: R. Gaston Gelos, Ratna Sahay, Guido Sandleris Nastazja Karbowiak, Joanna Stryjak

2. Introduction What determines the ability of governments from developing countries to access international credit markets? Problem: Literature hasconcentrated on volumes and terms for countrieswithaccess, overlooking the problem thatmany countries might be cut off from credit markets completely.

3. Introduction First: • Articleexamineswhatdeterminestheability of governmentsfrom developing countries to access international credit market. Period: 1980–2000, includesa subperiodofmarket stagnation and one of expansionwhen borrowing was easier

4. Fig. 1. Total flows of net private lending to public sector in developing countries. Source: Global Development Finance, World Bank.

5. Introduction Second: • Duration of exclusion from creditmarkets triggered by a default In  1980s if country had defaulted on their debt, it couldn’t access the market for 4 years. In 1990s average was 2 years

6. Introduction • Effecton market access of the frequency of sovereign defaults and their duration. Being in default prevents country from accessing the markets, BUTprobability of markets access is not influenced by a country’s frequency of defaults. If recent default is resolved quickly, it doesn’t reduce the probability of tapping the market

7. Introduction Third: • Assemble a disaggregated dataset on lending to sovereigns with detail sovereign default data.   • Focusing on bonds and bank loans dataand include private sector loans that areguaranteed by a government

8. Introduction Fourth: • Distinguishing between actual rationing by creditors and voluntary abstention of borrowers (to study ability of countries to borrow based on observed flows by identifying supply versus demand shifts)

9. Introduction Fifth: • Largerand richer countries access markets more frequently than those who suffer for worse policies etc. • But there is an evidence that trade openness matter

10. EmpiricalStrategy and Data • Market Access • To measure market access, inarticletherehasbeenusedunique micro dataseton: - international bondissuances, - borrowingthroughprivatesyndicatedloansfromnon- domestic banks, provided by Capital Data Bondware and Loanware.

11. EmpiricalStrategy and Data • Dataset contains information on: 2053 individual bond issuances and 5056 commercial bank syndicated loans to national governments (or with government guarantee) from 150 developing countries (1980-2000)

12. EmpiricalStrategy and Data • Market Access isdefined as: public or publicly guaranteed international bondissuances or borrowing through a private syndicated bank loan occurring in a year in which the country'sindebtedness increases

13. EmpiricalStrategy and Data • This definition aims to exclude cases where a sovereign's borrowing capacity falls but the country is still able to roll over part of its debt, which implies that the government is, in net terms, repaying and not borrowing. • In order to check whether the country's indebtedness actually increases when we observe a bond issuance or bank loan in the micro data, we use data on debt stocks from the World Bank's Global Development Finance database.

14. EmpiricalStrategy and Data 2. Factors influencing a country's ability and willingness to pay—and therefore its ability to access credit markets

15. EmpiricalStrategy and Data • The size of a country can affect its ability to borrow. • Income volatility and vulnerability to shocks may affect market access through different channels. • A country's economic links with the rest of the world can affect the costof default and, therefore, its ability to borrow. This aspect is captured by the share of FDI in GDP and measures of trade openness.

16. EmpiricalStrategy and Data • Political instability may adversely affect the investment climate. (International Country Risk Guide's(ICRG) Political Risk Index). • The quality of government policies and institutions can influence a country's creditworthiness (index of Country Policy and Institutional Assessment (CPIA)).

17. EmpiricalStrategy and Data • A country'sliquidity, ratios of exports to debt service, (World Bank's Global Development Finance database). • Multilateral assistance can help countries overcome liquidity problems (expectingIMF programs to have a positive impact on the ability of sovereigns to access credit markets).

18. EmpiricalStrategy and Data • Sovereign defaults should negatively affect market access(Standard & Poor's database on sovereign defaults on foreign currency debt). • Control variables are needed in panel estimations to abstract from global shocks that affect countries over time.

19. EmpiricalStrategy and Data 3.Empirical strategy • Focusing only on developing countries- capital-scarce countries should be borrowing large amounts to finance domesticinvestment, given their paucity of capital they should be willing to borrow.

20. EmpiricalStrategy and Data • Excludingcountries classified by the IMF's World Economic Outlook as “creditorcountries.” These are mainly oil producing countries. • Includingonlycommunist/socialistcountriesafter they initiated market-oriented reforms and became more outward looking, unless we observe them borrowing earlier.

21. EmpiricalStrategy and Data • Excludingcases in which we do not observe market access by sovereignsbut find that the private sector of that country has borrowed internationally. Finally the sample they work with is 139 countries

22. EmpiricalStrategy and Data Cross sectional data: • Examiningfactorsassociated with the frequency of market access • Definedas the ratio of the number of country-years in which the sovereign is observed accessing international credit markets to the total number of country-years in the sampleover the period 1980–2000

23. EmpiricalStrategy and Data Panel dimension of data: • Analyzingthe dynamics of market access orallowing to control for time varying factors. • Providinginsights as to whatchanges in country-specific factors are associated with market access after periods of exclusion (“switch in events”), or with periods of exclusion following years of access (“switch out events”)

24. Results 1. Sectional Analysis: We divide the 139 developing countries from our sample into three different groups according to their success in accessing the international credit markets during 1980–2000:

25. -No Access Group (G0): Includes countries that were unable to access international credit markets (according to our definition or market access) during the period. This group is very large with 57 countries (41% of all countries in the sample) - Occasional Access Group (G1): Includes countries that gain or regain access in the period but do not manage to access the marketsconsistently. Specifically, we include countries that access themarkets less than two-thirds of the time and find that 66 countries(47% of the sample) fall into this category. - Consistent Access Group (G2): Includes countries that accessed themarkets often (more than 2/3rds of the time). Only 16 countries(12% of the sample) belong to this group.

27. small: those with less than 5 million inhabitants; • medium: those with a population between 5 and 20 million; • large: those with populations exceeding 20 million. Within each group, income per capita seems to be strongly correlated with the frequency of access.

29. We now divide all countries in our sample into 3 groups accordingto their income per capita: (i) low: average GDP per capita less than $1000; (ii) middle: average GDP per capita between $1000 and $2000; (iii) high: GDP per capita larger than $2000

31. 2. Panel Analysis: We define a “switch in” year as one in which a country accesses the market after being unable to do so in the previous year, and a “switch out” year as one in which a country is unable to access the markets after being able to access it the previous year.

33. 3. Official versus private flows One concern regarding our approach is that there might be a substitution between official and private capital flows, particularly for poor countries, which could erroneously lead us to conclude that countries were cut off from the markets when in fact they were substituting away from private loans in favor of official loans.

34. 4. State dependence and robustness of the dependent variable A potential issue that we investigate is the presence of state dependence. There are two reasons why a country that has had market access yesterday may be more likely to gain market access today. First, countries might differ in certain characteristics that persist over time that matter for market access. Second, it is possible that gaining market access at some point, per se, fundamentally changes the likelihood of a country to tap the markets again. This is sometimes referred to as the difference between “spurious” and “true” state dependence.

35. 5. Sovereign defaults and typical periods of exclusion Both our cross-section and panel analysis show that being in default has a negative effect on market access. Table 2 sheds more light on the relation between market access and defaults by answering the question of how long it takes countries to regain market access after defaults.

37. Conclusions First: Largerand wealthier countries borrow more and more often. In fact, population and GDP per capita alone explain a considerablefraction of the total variation of market access across countries.

38. Conclusions Second: The perceived quality of policies and institutions matterssubstantially. In addition, the Institutional Investor Index captureswell the additional element of “market perceptions” beyondstandard measurable country characteristics and has a positiveeffect on market access.

39. Conclusions Third: Countriesthat are more vulnerable to shocks are less likelyto be able to tap international credit markets.

40. Conclusions Fourth: Highershares of FDI investments in GDP are generallyassociated with higher access by sovereigns. However, contrary toa-priori expectations, a country's trade integration with the rest ofthe world is not

41. Conclusions Fifth: Afterthe perceived quality of policies is controlled for, we donot find a clear catalytic effect of IMF programs. This, of course, hasto be qualified by the fact that the perceptions of policies themselves are likely to be affected by the presenceof an IMF program.

42. Conclusions Sixth: The probability of market access is not influenced by thefrequency of default events, and a default, if resolved quickly doesnot reduce the probability of tapping the markets significantly. However, being in default does have a negative impact on market access, as expected.