Borrowing Countries Research Articles

An In-depth analysis of government debt to GDP of the three selected African countries and its effects on their Economy

This study investigated the effects of Government debt to the GDP of the 3 selected African Countries and the negativity on their economy using data from 2012-2020. The provable/empirical results showed that debt effects enhanced growth only on a short term and hindered growth in the long term. Debt servicing has negative impacts on the borrower country’s economy because It takes a large benefit from the domestic economy to transfer to the foreign economy. Therefore, the country foregoes some spectacular multiplier accelerator effects. Debt servicing, including interest payments and repayments, may also be a real leakage from an indebted country. The study suggested that government should channel the borrowed funds on both infrastructural development and the productive base of the economy, that will improve long-term economic growth, expand the revenue base, and strengthen the capacity to repay outstanding debts when due. Government should put in place a debt management mechanism that will prevent the government from default.

Partisan External Borrowing in Middle-Income Countries

AbstractWhy do middle-income country governments use costlier sovereign debt markets when cheaper finance is available from official creditors? This research note argues that left-leaning governments with labor and the poor as core constituencies are likely to prioritize markets in their annual foreign borrowings. This is because markets provide an exit option from official creditor conditions that have disproportionately negative effects on working classes. This finding puts limits on disciplinary assumptions that left-leaning governments should have relatively less access to sovereign debt markets and thus use them less. Instead, left-leaning middle-income countries are likely to use proportionally more market finance as they fulfill annual foreign borrowing needs. This, in turn, shapes which middle-income countries are likely to become relatively more exposed to global debt market costs and pressures as they accumulate external debt over time.

Curse of friendship: IMF programme, friendship with the United States and foreign direct investment

AbstractHow do investors respond when a country participates in an International Monetary Fund (IMF) programme? While there exists some optimism in and around the IMF on the catalytic effect of a Fund programme, empirical research on the catalytic finance reports rather diverse findings; contrary to most theoretical research, empirical studies report both positive and negative effects as well as null effects. This paper revisits the question of whether and how an IMF programme catalyses other finances, focusing on the catalytic effect on foreign direct investment (FDI). We modify the core theoretical logic behind the catalytic finance to identify conditions under which an IMF programme is more likely to catalyse FDI: we highlight the credibility of an IMF programme as a key determinant of any positive catalytic effect it may have and reason that politically motivated lending by the IMF can attenuate a programme’s credibility, depressing the catalytic effect. We empirically capture politically motivated lending by looking at the relationship between a borrowing country and the United States and demonstrate that IMF loans to countries closely aligned with the United States are less likely to catalyse FDI than loans to countries that are not aligned with the United States.

Державний борг України: виклики та загрози для економіки

The scientific study carried out a retrospective analysis on the interpretation of the concept of «government debt» and defined its role for the State and society. It was found that the most liberal approach to the formation of government debt obligations and tax pressure on society can be traced when considering the Keynesian theory. The essence of the concept of «debt» in the Civil Code of Ukraine is defined. Thus, given the complexity and diversity of the definition, the legislator cites the interpretation of debt from the standpoint of financial relations between the borrower and the lender. The concept of «government debt» has certain specific characteristics, although there are common features with the well-known concept of «debt». This is connected with the presence of a special status of the debtor, a role acted by the State, which at the same time can also be a creditor for business entities and certain sectors of the economy. The article analyzes the formation of government debt from 2010 to 2022 As of the end of the second quarter of 2022, the government and government guaranteed debt of Ukraine amounted to UAH 3083.22 billion, including: government and government guaranteed external debt – UAH 1789.39 billion; government and government guaranteed domestic debt – UAH 1293.83 billion. Such a significant amount of government debt in 2022 is caused by the need to finance the costs of the army and protection of the territorial integrity of Ukraine. According to experts in the field of public finance management, at the end of 2022 the government debt in relation to GDP will be about 106%. This indicator is quite high, but does not pose a significant threat to the country’s economy. It is determined that with the normalization of the situation and with the growth of economic potential, debts can be repaid on time and in full. The authors of the article support the position on the impossibility of default on the debts, since this economic phenomenon negatively affects the reputation of the borrower country in the future.

COVID-19, nonperforming loans, and cross-border bank lending

A severe economic downturn brought on by the COVID-19 pandemic, combined with high debt levels globally, raises the specter of mounting nonperforming loans (NPLs) in global banking systems. This paper investigates the impact of higher NPL ratios on the availability of bank credit among international lenders and emerging market borrowers. The paper finds that a rise in NPL ratios in both lender and borrower countries is positively associated with higher banking outflows from emerging market economies. Two additional features emerge in the patterns of cross-border banking flows when NPL ratios rise that are related to international credit market imperfections. First, lenders are more responsive to a rise in NPL ratios of same-region borrowers. This is consistent with the “reversion to the mean’’ effect given their generally high exposures to the same-region borrowers. Second, while a high share of US-dollar-denominated debt is generally positively associated with withdrawals of funds from emerging market borrowers, lenders are less responsive to a rise in NPL ratios in emerging market economies if their liabilities are denominated more in US dollars. The results are in line with the “original sin redux” hypothesis.

The road to the 1980s write-downs of sovereign debt

The Latin American debt crisis consumed the 1980s and was not restricted to Latin America. Starting from the August 1982 Mexican weekend, the crisis had three phases: Concerted Lending (1982-5), Baker Plan (1985-9) and Brady Plan (1989 to mid 1990s). This article describes the evolution of the debt strategy and the road to embracing debt write-downs at the end of the decade. In the absence of an external coordinating mechanism, four groups of parties had to reach agreement on any change in the strategy: the borrowing countries, their commercial bank lenders, the home-country authorities of those lenders, and the International Monetary Fund as the principal international institution. Each group could effectively veto any change in the strategy. This need for consensus is lesson number one from the 1980s for today. Lesson number two is that political economy aspects dictated that the strategy be implemented on a case-by-case basis. The article concludes with an application of these lessons to a similar, but even more global, potential debt crisis in the wake of the COVID pandemic.

The effect of borrower country financial system and corporate governance system types on the spread of syndicated loans

PurposeThis study aims to analyse the effect of borrower’s countries on syndicated loan spreads, featuring countries according to institutional factors, namely, financial systems and corporate governance systems.Design/methodology/approachThis study is an empirical investigation based on a unique sample of more than 85,000 syndicated loans from 122 countries. The paper uses standard and two-stage least squares regression analysis to test whether the types of financial and corporate governance systems affect loan spreads.FindingsThe paper finds that borrowers from countries with financial systems oriented towards the banking-based paradigm pay lower interest rate spreads than those from countries with financial systems oriented towards the market-based paradigm. In addition, there is evidence that borrowers from countries with more developed financial systems pay lower spreads. The results also show that borrowers from countries with an Anglo-Saxon governance system pay higher spreads than borrowers from countries with a Continental governance system.Research limitations/implicationsThis study does not consider potential promiscuous relationships that can arise at the ownership structure and governance level between banks and borrowers and may affect loan spreads.Practical implicationsThis study suggests that financial and corporate governance systems are essential factors in the financial intermediation process. Furthermore, the evidence indicates that corporates with higher potential agency costs and higher potential information asymmetry are requested to pay higher spreads. Therefore, the opportunities to such corporates invest optimally tend to be scarcer.Originality/valueThe paper highlights the impact of institutional factors on the cost of financing, characterising the countries according to the type of financial system and the type of corporate governance system. The study finds that borrowers from countries with bank-based financial systems pay lower interest rate spreads than those from countries with market-based financial systems. The paper also highlights how the level of financial development affects the cost of financing. The paper focusses on non-financial firms, unlike financial firms, which have been the focus of several empirical studies on topics relating to the cost of funding and corporate governance.

The determinants of IMF fiscal conditionality: Economics or politics?

AbstractConditionalities, measures that a borrowing country should adopt to obtain loans from the International Monetary Fund (IMF), are pervasive in IMF programs. Empirical work on the determinants of IMF conditionalities typically employs indicators based on the number of conditions as proxies for program austerity. This paper estimates the effects of political and economic factors on a different measure of stringency of conditionality: the fiscal balance requested in an agreement. The correlation between the number of conditions and the requested fiscal adjustment is close to zero in our sample. The requested adjustment is strongly linked to the country's fiscal deficit but is also affected by politics. For middle‐income and upper‐income countries, political alignment with the US has a significant negative effect on the fiscal effort required by the IMF.

DETERMINANTS OF INTEREST RATES ON CORPORATE DEBT

Abstract. The objective of this article is theoretical and methodological justifying of determining algorithm of the cost of debt capital for enterprises functioning in emerging markets (EM). The methods of research: analysis and synthesis, system analysis, comparative analysis, empirical and statistical methods, factor analysis. Results. In this article key determinants of interest rates on debt capital for enterprises and their impact on the procedure of discount rate calculation are determined. The issue of the cost of debt calculation of enterprises in condition of absence of complete information concerning systematic and non-systematic crediting risks is studied. Differences between interest rate on the loan fixed in credit agreement and expected by creditors the cost of debt are identified. It is determined that the key factor impacting the deviation level of market value of debt capital from the nominal, and respectively, deviation of the cost of debt from the cost of capital is probability of default (PD). At the minimum values of PD, the contract interest rate corresponds to the rate of cost of debt and it is advisable to use it for discount rate calculation. Critical analysis of alternative methodological approaches of the cost of debt calculation is made. Ways of integrating of market information concerning credit default swaps into the process of expected cost of debt calculation are justified. Factors of shadowing of rates of the cost of debt and ways of reducing of shadow transactions’ level in the credit market are identified. Conclusions. At high PD values, expected by market premium for default risk may exceed the contract interest rate, which necessitates constant monitoring of credit risks and appropriate adaptation of interest rates. In the paper the algorithm of such adaptation are proposed. It is shown that in the case of non-use of interest rates adjustment taking into account changes in PD, CDS and LGD, premium for creditors’ systematic risk can differ significantly from market values of similar enterprises (peer-group), and estimated value of the cost of debt can acquire negative values. Contract (promised) interest rate should be set in such way that the premium for systematic risk of providing debt capital will be at the level of similar companies and does not change significantly as a result of probability of default changes. If in practice the opposite situation occurs, it is the evidence of contract interest rate shadowing, absence of effective system of assessment and management of credit risks. For solving the problem of interest rate transparency and filling of information gaps concerning PD borrowers in EM countries, should intensify CDS market. Keywords: debt capital, default probability, non-performing loans, credit default swap, credit spread, debt capital premium, shadow economy. JEL Classification E47 Formulas: 16; fig.: 0; tabl.: 3; bibl.: 15.

Policy referencing patterns in South Korea: The Free Year Program and the High School Credit Policy

This study sets out to examine the referencing patterns of two key policies in South Korea, the Free Year Program (FYP) and the High School Credit Policy (HSCP). Classic reference countries US and Finland were frequently cited in the HSCP sample while less cited references such as Ireland, Sweden, and Denmark appeared for the FYP. In many cases, referenced countries were linked to a distinct set of themes across policies. The active and widespread practice of referencing in Korea is demonstrated by the large proportion of external references at the start of each policy cycle for the FYP and HSCP as well as the wide range of reference countries spread across multiple themes. Our study demonstrates how the same borrower country (Korea) can develop a repertoire of varying reference societies depending on the specific policy to legitimize domestic pursuits.

Domestic Lending and the Pandemic: How Does Banks' Exposure to Covid-19 Abroad Affect Their Lending in the United States?

<ns3:p>We study how U.S. banks' exposure to the economic fallout due to governments' response to Covid-19 in foreign countries has affected their credit provision to borrowers in the United States. We combine a rarely accessed dataset on U.S. banks' cross-border exposure to borrowers in foreign countries with the most detailed regulatory ("credit registry") data that is available on their U.S.-based lending. We compare the change in the U.S. lending of banks that are more vs. less exposed to the pandemic abroad, during and after the onset of Covid-19 in 2020. We document strong spillover effects: U.S. banks with higher foreign exposures in badly "Covid-19-hit" regions cut their lending in the United States substantially more. This effect is particularly strong for longer-maturity loans and term loans and is robust to controlling for firms’ pandemic exposure.</ns3:p>

International Lending: The Role of Lender's Home Country

AbstractThe multinational syndicated loan market has crossed the $7 trillion threshold. Prior literature argues that weak borrower country's creditor rights is the main limiting factor to cross‐border lending. We find that lender country's creditor rights can partly substitute for weak borrower creditor rights if a lender is from a better creditor rights country. Our results are robust to controlling for a borrower's country laws, its foreign assets, the loan guarantees provided by its foreign parent, and its choice set of lenders.

IMPACT OF IMF LENDING ANNOUNCEMENTS ON THE PERFORMANCE OF STOCK MARKET: EMPIRICAL EVIDENCE FROM PAKISTAN

Purpose of the study: Stock markets have demonstrated varying reactions to IMF lending announcements across various economies. Announcements offered by IMF often be perceived negatively by the participants of the stock market, because of stringent conditions accompanied with the loan that may oppose the political and economic agenda of a borrowing nation. Thus, this study intends to investigate the impact of IMF’s announcements about extending loans to Pakistan on the performance of the Stock market in the debt-ridden economy.
 Methodology: For regular returns from 1997 to 2017, the benchmarking indexes of KSE-100 and 30 were used. Meanwhile, IMF lending arrangements are categorized into three respective dummies (standby, extended credit facility, and extended fund facility). The Generalized Autoregressive Conditional Heteroscedastic (GARCH) model was used to investigate the effect of IMF’s lending news on the regular stock returns.
 Main findings: The results show a statistically significant effect of the IMF’s News about lending arrangements on the performance of the stock market in Pakistan. Surprisingly, the negative effect of IMF lending announcements on the performance of the stock market in Pakistan implies that the loans extended by IMF are not professed by speculators as good for the economic performance of the economy.
 Application of this study: The findings of this study imply that simply extending loans is not a panacea for politically unstable and financially ruined nations. Lending strategies of IMF need to be favourable for the political and economic conditions of a borrowing country.
 Originality/ Novelty: As for as the novelty is concerned, the study has highlighted the time-varying impact of IMF lending announcements on the performance of the stock market in a financially fragile country where a newborn government facing multiple challenges has made its best effort to avoid borrowing from IMF.

Unimplementable by design? Understanding (non‐)compliance with International Monetary Fund policy conditionality

AbstractWhy do governments fail to implement policy commitments in contractual agreements with international organizations? While scholars have scrutinized domestic factors as obstacles to compliance, we argue that reform programs may beunimplementable by design. We study this hypothesis in the context of International Monetary Fund (IMF) programs, in which borrowing countries must commit to far‐reaching economic policy reforms for access to credit. We collect detailed compliance data on individual policy conditions to assess the determinants of compliance failures of IMF programs from 1980 to 2009. Controlling for a host of borrower‐specific variables, features of the loan, unexpected shocks during implementation, donor influence, and bureaucratic interest, we find that the number of conditions is a robust predictor of implementation failure. Our theoretical explanation for these findings is that over‐ambitious program designs are the result of intra‐organizational bargaining within the IMF bureaucracy. While an area department within the IMF drafts the initial reform program, functional departments use their amendment power to include policy conditions that they care about, without due consideration of local circumstances, which leads to over‐ambitious programs. These findings have important implications for theories of compliance as well as for policymaking in international organizations.

Resource-Financed Infrastructure: Thoughts on Four Chinese-Financed Projects in Uganda

Increasingly common methods for financing public infrastructure in developing economies are Resources-for-Infrastructure (R4I) and Resource-Financed Infrastructure (RFI), usually involving Chinese financial institutions and Chinese construction companies. Although there are advantages to the borrowing country from these project financing arrangements, there are also various issues and governance challenges. In Uganda, expectations around future revenue from oil extraction have led to many infrastructure projects being commissioned, mostly funded by RFI arrangements. To consider the appropriateness of these arrangements and to reflect on whether they are likely to contribute to positive development outcomes or be examples of the resource curse, we examined four public infrastructure projects: Kampala–Entebbe Expressway; Karuma Hydroelectric Dam; Isimba Hydroelectric Dam; and the Malaba to Kampala section of the East Africa Standard Gauge Railway. Although R4I/RFI arrangements are viewed positively by some commentators, others (especially local companies) consider they lack transparency, create unsustainable debt, promote China’s interests over the borrowing country, increase unemployment, unfairly compete with local business, deal in corruption, have poor working conditions, and result in substandard construction. Nevertheless, we conclude that Uganda and other developing countries have generally benefited from Chinese-funded infrastructure, and there is more myth trap than debt trap. However, to ensure positive development outcomes, governments and construction companies should ensure compliance with international standards, especially relating to: environmental and social impact assessment; human rights; benefit-sharing arrangements; livelihood restoration; and project-induced displacement and resettlement.

The impact of risk-based capital rules for international lending on income inequality: Global evidence

This paper investigates the impact of international bank flows from G10 lender countries on income inequality in 74 borrower countries over 1999–2013. Specifically, we examine the role of international bank flows contingent upon the Basel 2 capital regulation and the level of financial market development in the borrower countries. First, we find that improvements in the borrower country risk weights due to rating upgrades under the Basel 2 framework significantly increase bank flows, leading to improvements in income inequality. Second, we find that the level of financial market development is also important. We report that a well-functioning financial market helps the poor access credit and thereby reduces inequality. Moreover, we employ threshold estimations to identify the thresholds for each of the financial development measures that borrower countries need to reach before realizing the potential reductions in income inequality from international bank financing.

Geographic diversification and bank lending during crises

We classify a large sample of banks according to the geographic diversification of their international syndicated loan portfolio. We show that diversified banks maintain higher loan supply during banking crises in borrower countries. Positive loan supply effects lead to higher firm investment and employment growth. Diversified banks are stabilizing due to their ability to raise additional funding during times of distress. Distinguishing banks by nationality reveals that diversified domestic banks are a stable source of funding, while foreign banks with little diversification are fickle. Findings suggest that declining financial integration makes countries more vulnerable to local financial shocks.

A AKIBAT HUKUM PEMBATALAN PERJANJIAN BILATERAL TERKAIT PINJAMAN KEPADA CHINA DALAM PERSPEKTIF HUKUM INTERNASIONAL

The One Belt One Road (OBOR) project initiated by the Chinese Government has gripped countries in the international community. Especially to Southeast Asia, where Malaysia and Indonesia are borrowing countries to China. Replacement of government in Malaysia related to corruption cases 1 MDB, resulting in changes in government policy Malaysia. The cancellation basis, because all the raw materials or the materials used are from China following also engineers and unskilled laborers, thus causing a massive migration from China to Malaysia. In the case of this cancellation, of course, the legal consequences for Malaysia as a borrowing country and China as a lending country. Unlike Indonesia, which until now, it is known that the Indonesian Government has established bilateral relations with the Chinese Government in terms of infrastructure development, such as: toll road and airport in Indonesia. The main problem in this study, namely if this bilateral dispute is brought to the International Court of Justice, is the mechanism for executing an international court decision to be issued later.

Non-US Global Banks and Dollar (Co-)Dependence: How Housing Markets Became Internationally Synchronized

US net capital inflows drive the international synchronization of house price growth. An increase (decrease) in US net capital inflows improves (tightens) US dollar funding conditions for non-US global banks, leading them to increase (decrease) foreign lending to third-party borrowing countries. This induces a synchronization of lending across borrowing countries, which translates into an international synchronization of mortgage credit growth and, ultimately, house price growth. Importantly, this synchronization is driven by non-US global banks’ common but heterogenous exposure to US dollar funding conditions, not by the common exposure of borrowing countries to non-US global banks. Our results identify a novel channel of international transmission of US dollar funding conditions: As these conditions vary over time, borrowing country pairs whose non-US global creditor banks are more dependent on US dollar funding exhibit higher house price synchronization.

Multinational banks and the formation of debt-type economy in the countries of Central and Eastern Europe

Research background: Given the fact that multinational banks’ credit activity leads to the accumulation of external debt in the borrowing countries, which potentially contributes to the formation of a debt-type economy, more in-depth research of the scope and consequences of such impact on the example of specific recipients is required. Purpose of the article: The purpose of the article is to develop theoretical and methodological bases of the study of multinational banks’ lending activity in terms of debt-type economy on the example of the countries of Central and Eastern Europe. Methods: A system of general scientific and special research methods, namely, statistical (correlation analysis, in particular), structural-functional and comparative analysis, has been applied to achieve the above-mentioned purpose. Findings & Value added: The results of the study indicate that multinational banks’ direct cross-border lending remains an important source of external debt accumulation and the formation of a debt-type economy in the countries of Central and Eastern Europe. Based on the assessment of the external debt indicators of the countries under the study, it has been determined that they all can be classified as debt-type economies. At the same time, the countries of the group still remain significantly differentiated in terms of relative indicators of direct cross-border lending and external debt. It has been concluded that multinational banks’ aggressive lending strategy during the growth phase in the countries of Central and Eastern Europe has exacerbated the problem of external indebtedness during the recession phase.