Debt Position Research Articles

Re-thinking the sustainability of sovereign debt

Abstract This article explores the contributions that law can make to the development of a holistic approach to sovereign debt sustainability. We focus on debt sustainability assessments (DSAs) conducted by the International Monetary Fund (IMF), which are linked to the IMF’s surveillance and lending functions, and determine whether it is necessary to restructure the debt of a country in debt distress and the timing, process, and terms of such a debt restructuring. While the precise causes of each country’s debt situation are unique, all countries are grappling with the rising costs and growing risks posed by climate change and other environmental and social factors. We suggest that the IMF’s current treatment of these environmental and social factors is opaque, unpredictable, and hard for the citizens of affected countries and other outsiders to understand. It also obscures the true burden that debt obligations impose on a sovereign and the country’s residents, and, thus, the amount of debt relief that it may need in order to achieve a sustainable debt position. To address these shortcomings, we identify financial, economic, environmental, and social (FEES) factors that we contend should be incorporated in the design of the frameworks governing DSAs and the operating principles and practices of the IMF through which DSAs are conducted. We argue that the IMF should draw on various hard and soft sources of international and transnational law to develop a FEES-based approach to sovereign debt sustainability that is more consistent, predictable, and legitimate than the current approach.

Oil price volatility and changes in corporate debt: An empirical study in the Indian landscape

Changes in crude oil prices affect corporate debt position. This study investigates the association between changes in debt and crude oil price volatility in nonfinancial, BG, and SA firms in India. We use financial variables, crude oil prices, and macroeconomics data from 2004 to 2020 for 16,452 firm-years and this study employs unbalanced panel data and utilizes different empirical methodologies, including the generalised method of moments (GMM) estimator, to test the stated hypotheses. The results reveal that the debt position and the crude oil price volatility significantly have different effects on business group (BG) and stand-alone (SA) firms. Crude oil price volatility is positively related to changes in the debt position. The effects of the financial variables also significantly differ for the BG and SA firms. Finally, firms change their debt position in the positive or negative direction based on the fluctuations in crude oil prices. Policy implications have also been provided.

Macroprudential policy with earnings-based borrowing constraints

A large literature has studied optimal regulatory policy in macroeconomic models with asset-based collateral constraints. A common conclusion is that agents ‘over-borrow’ and optimal policy reduces debt positions through taxes. The reason is that agents do not internalize the effects of their choices on asset prices. However, recent empirical evidence shows that firms primarily borrow against their earnings rather than their assets. This paper studies optimal macroprudential policy with earnings-based borrowing constraints, both in closed and open economies. We reach the opposite conclusion to the previous literature. Agents ‘over-save’ (and ‘under-borrow’) relative to the social optimum, as they do not internalize changes in wages, which in turn affect firms’ earnings. A numerical model exercise demonstrates that incorrectly rolling out a tax policy derived under the assumption of asset-based constraints in an economy where firms actually borrow based on earnings leads to a consumption equivalent welfare loss of up to 2.55%. Optimal macroprudential policy thus critically depends on the specific form of financial constraints.

Pengaturan dan Kedudukan Debitur Wanprestasi dalam Proses Eksekusi Penjualan Objek Hak Tanggungan Milik Pihak Ketiga Secara di Bawah Tangan

Credit agreements utilizing Mortgage Rights provide preferential treatment to creditors. In case of debtor default, creditors can liquidate the mortgaged land to settle the debt. The Indonesian Mortgage Law (UUHT) only allows for extrajudicial foreclosure with consent from the grantor and the mortgagee. However, the regulation concerning third-party foreclosure and the debtor's position in this process under UUHT remains ambiguous. This research employs a normative approach, utilizing statutory and conceptual methods. Findings reveal that UUHT does not specifically regulate third-party foreclosure sales. Debtors act solely as recipients of debt repayment rights, yet they hold influence in determining the foreclosure process. Consequently, creditors lose the ability to independently sell the property and recover payments, thus diminishing creditor preference.

HOUSEHOLD DEBT AND THE EFFECTS OF FISCAL POLICY

AbstractWe examine how the effects of government spending shocks depend on the balance sheet position of households. Employing U.S. household survey data, we find a large, positive consumption response for households with mortgage debt, smaller response for renters, and an insignificant response for outright homeowners, in response to a positive government spending shock. We consider a model with three types of households and show that it can successfully account for these findings. Liquidity constraints and wealth effects play a crucial role in shock propagation. Our findings suggest the importance of household mortgage debt position in the transmission mechanism of fiscal policy.

Analysis of Asset Management Ratio and Solvency Management Ratio

Profit is total income after deducting company costs or what can be called net profit. Profits generated by a company can be a benchmark for a company's success. To gain large profits, a company must be able to manage assets effectively and efficiently, because this can show that the company has good financial performance. One of the ratios that investors most often consider is the total assets turnover ratio. However, often a high asset management ratio does not indicate the company's effectiveness in managing high assets, but because inventory levels are low. A company is said to be insolvent when its debt position is greater than the total assets owned by the company. To find out whether it is solvable or not, it can be calculated using the debt to equity ratio. PT FKS Food Sejahtera Tbk (IDX: AISA) is a food producing company headquartered in Jakarta, Indonesia. This company was founded in 1990, with the main products being various types of ready-made food. The purpose of this research is to analyze asset management ratio and solvency management ratio PT FKS Food Sejahtera Tbk. The type of research in this research uses qualitative descriptive research. The subject of this research is PT FKS Food Sejahtera Tbk whose financial report data is from 2015 to 2021. The object of this research is asset management ratio and solvency management at PT FKS Food Sejahtera Tbk. The analysis method in this research uses a time series analysis approach. The results of this research show that the average fixed asset turnover of PT FKS Food Sejahtera Tbk is 1.15 times. The average total asset turnover of PT FKS Food Sejahtera Tbk is 0.7 times. The average debt ratio at PT FKS Food Sejahtera Tbk from 2015 to 2017 has a value of 1.38 which becomes unsafe in 2017, 2018, and 2019. The multiple that received the highest profit was in 2019 with a multiple of 12.15.

IMPROVING THE EFFICIENCY OF CURRENT ASSET MANAGEMENT ASSETS AND SHORT-TERM LIABILITIES OF URBAN DEVELOPMENT ENTERPRISES

The article proposes an approach that takes into account inflationary factors in the tactics of financial management, namely in the processes of managing current as-sets and short-term liabilities of enterprises involved in urban development (a rein-forced concrete plant, a house-building enterprise, etc.). The most important point here is the choice of the level of the interest rate at which discounting is performed. This value is commonly referred to as the comparison rate. An important point in deter-mining the interest rate used for discounting is the consideration of risks. Since the risk in the analysis of production investments, regardless of its specific forms, ultimately appears in the form of a possible decrease in the real return on capital compared to the expected one, and this decrease again manifests itself in time, therefore, as a general recommendation for taking into account possible losses from reduction in returns, in-flationary depreciation of money, etc. it is usually proposed to introduce an amendment to the level of interest rate characterizing the yield on risk-free investments (for ex-ample, in short-term government securities), i.e. to add a certain risk premium that takes into account both the specific risk associated with the uncertainty of receiving income from a specific investment of an enterprise involved in urban development (a reinforced concrete plant, a house-building plant, etc.) and the market risk associated with the situation. This approach is particularly relevant in Ukraine today, with the ongoing war with Russia. The study presents the basic principles of tactical financial management of Ukrainian urban development enterprises in the context of high infla-tion, which relate to the following 1) volumes and speed of turnover; 2) net debtor position; 3) dynamics of enterprise prices and the method of calculating weighted av-erage prices; 4) changes in consumer costs when prices for raw materials, energy, equipment, etc.; 5) the policy of using of free cash of the enterprise in case of infla-tionary depreciation.

GST and Debt Sustainability: The Indian Experience


 In the context of a perceptible rise in the share of sub-national debt in India’s total public debt, and the predominant role of GST as a revenue source for the state, this study attempts to analyse the sustainability of debt policies adopted by sub-national governments in the context of GST. It looks at the 20 major Indian states, using the fiscal policy response function, two alternative specifications, and panel data methodology to analyse the issue at aggregate and disaggregate levels during GST regime. The results indicate that the debt policy is sustainable at the aggregate level, but only in 9 states at the disaggregate level during the GST regime. However, when GST compensation is excluded from the model, the test results do not indicate that Indian states pursued sustainable debt policies. The observed results are then amplified and corroborated using an indicator-based approach, and it is concluded that the GST remains an undermining factor of debt sustainability. Overall, the study draws attention to the states’ poor revenue performance after GST, and the challenges to the sustainability of their debt position. Policy intervention should be sought to improve the debt situation through an effective GST mechanism in states where the debt is unsustainable.

On the Growth Factors and Model of Economic Development of China

The growth dynamics of the Chinese economy and the factors of its growth in recent years (2017–2022) are analyzed. Particular attention is paid to the role of foreign trade, the movement of cross-border capital in the economic development of the PRC, and the state of its debt position. A number of conclusions are made regarding the prospects for growth and evolution of China's economic development model. Over the past ten years, the third sphere (services) has become a leading in the production of China’s GDP, ahead of the second (industrial) sphere. The analysis of GDP structure on expenses shows that the economic growth of the PRC is primarily supported by the internal factors of consumer and investment demand. The net export of goods and services currently occupies a secondary position among growth factors. A comparison of China’s GDP dynamics and foreign trade shows the high stability of the Chinese economy to changes in trade volumes. It is noted that China's priority efforts are focused on the formation of a new model of economic development: innovative in nature, based on a capacious domestic market, closely interacting with the world. Actively used by China until recently, the export-oriented development model has long exhausted itself in many respects. The new innovative development model will differ from the development model of new industrial countries that have solved similar tasks of maintaining growth. First of all, in China’s huge domestic market and the need to use to all domestic and external growth factors. Such a development model is designed to ensure high quality growth and sustainable development. Innovation will replace export orientation and capital accumulation as a key driver of growth. This will make it possible to fully develop an intensive type of growth instead of an extensive one. The factors of domestic consumer and investment demand, as well as external export demand, will continue to play an important supporting role in ensuring China's economic growth.

РЕГУЛЮВАННЯ ВАЛЮТНОГО РИНКУ УКРАЇНИ В УМОВАХ ФІНАНСОВОЇ НЕСТАБІЛЬНОСТІ ВОЄННОГО ЧАСУ

The article examines the peculiarities of the functioning of the currency market of Ukraine since the beginning of the full-scale invasion. The exchange rate dynamics in the pre-war period are shown and the factors of its formation in 2022-2023 are determined. It is noted that a significant inflow of capital into the country in the form of foreign aid from allied countries makes it possible to compensate for the foreign currency deficit. The NBU's measures to maintain exchange rate stability and their consequences for the monetary sphere in general and the foreign exchange market, in particular, are analyzed. Based on the study of risks and threats to the stability of the foreign exchange market, appropriate measures of the NBU to neutralize them in the conditions of martial law have been determined. The expediency of fixing the exchange rate at the current stage and the conditions for restoring the regime of flexible exchange rate formation are substantiated. It is established that during the period of martial law, financial markets remained stable due to the significant inflow of non-market capital into the country, the application of a fixed exchange rate and currency restrictions. Such positive consequences of maintaining a fixed exchange rate of the hryvnia as curbing the volatility of the foreign exchange market, reducing the cost of risk insurance, reducing the vulnerability of the economy to changes in capital flows, and stabilizing Ukraine's debt position have been identified.The directions for improving the regulation of the foreign exchange market in the short and long term are outlined. The NBU's strategic direction regarding the regulation of the foreign exchange sphere is the movement towards the gradual weakening of currency control and the removal of currency restrictions introduced at the beginning of the war, the transition to flexible exchange rate formation and the return to the monetary policy of inflation targeting. The restoration of production and the adjustment of transport logistics (opening of ports and/or setting up of alternative transportation routes), the revival of exports and the growth of foreign exchange earnings from other sources will ensure an increase in the supply of foreign currency on the market. After the cessation of hostilities, the NBU should conduct an exchange rate policy taking into account the tasks of post-war reconstruction, balancing between the stimulation of imports and the attraction of foreign investments

Craig Burnside (ed.). Fiscal Sustainability in Theory and Practice: A Handbook. Washington, D. C.: World Bank. 2005. pp.xx+285. Price not given.

Fiscal sustainability is essential for economic growth and comprises a set of fiscal policies that result in financial solvency over the long run. As such, fiscal sustainability is the prime objective of the World Bank’s Quality of Fiscal Adjustment Thematic Group (QFATG). It is a main issue in developing countries. The articles compiled from many journals here address fiscal sustainability analysis and the practical work undertaken by the Bank’s Development Economic Research Group (DECRG) or Poverty Reduction Economic Management undertaken by the Economic Policy Group (PRMEG) and others. This book, basically a combination of economic theory and practical methods of analysis, provides a simple set of tools to assess a government’s budget and debt position and is a comprehensive source of information on fiscal sustainability. It describes the effects of business cycles on public finance and examines the role of fiscal rule and currency crises and their impact on fiscal sustainability. Some basic concepts are explained, with solutions of complicated practical problems such as contingent liabilities, external debt position, and fiscal federalism.

Sovereign Debt Restructuring: The Way Forward

Abstract The timely and orderly resolution of sovereign debt crises has long been a key challenge facing the global financial architecture. The framework for crisis resolution evolved in response to the capital account crises of the 1990s (Mexico, Russia, Southeast Asia), the Argentine crisis of 2001 and its aftermath, and the Global Financial Crisis of 2008–9 which morphed into the Euro area debt crisis of 2010–12. Efforts to expedite crisis resolution involved a two-pronged approach, one focusing on IMF policies and lending facilities and the other on ways to overcome the collective action problems involved in restructuring securitized debt. This paper examines these efforts in the context of the crises that triggered them and provides some guidance for the future. It argues that the way forward involves action on several fronts, including restoration of the essential principle that IMF programs should aim at reaching a manageable debt position within the program period with a high probability.

The impact of local government fiscal gaps on public-private partnerships: government demand and private sector risk aversion

While government fiscal gap is traditionally considered a demand factor for the use of public-private partnerships (PPPs) to deliver public services, a high level of fiscal gap may signal elevated financial risks to private partners and deter them from entering into PPP agreements. A causal mediation analytic framework is used to delineate the two distinct causal pathways. We develop a conceptual model and test derived hypotheses with data of Chinese prefecture-level cities during 2015–2017. The findings suggest that government fiscal gap has a positive impact on PPP adoption, through the mediating role of the debt position. The fiscal gap, as a risk factor, is negatively associated with PPP participation. Risk aversion of the private sector manifests more conspicuously as smaller PPP investment amounts than as a lower likelihood of PPP participation. The adverse effects of the fiscal gap associated with financial risks may entirely offset any positive impact.

Public Debt and External Debt Sustainability among BRICS Countries

This study analyses an important policy issue pertaining to the public debt and external debt of BRICS nations from 1993 to 2020 using the Bohn framework and a penalised-spline estimation method. It also checks the robustness of the results using the ADF and co-integration tests. The results indicate that as the primary surplus reacts positively and significantly to public debt in China and South Africa, the debt is sustainable in these nations. In Brazil, India and Russia, the debt is not sustainable. The external debt policy is sustainable only in China and not in other BRICS nations. These results suggest the need for immediate policy interventions in Brazil, India and Russia to achieve sustainable levels of public debt and external debt. We hope that these results will be useful to policymakers and other stakeholders to take appropriate strategies to improve the public debt and external debt position of BRICS nations and to make them sustainable. JEL Codes: H63, C23, D72, E62, H72

External Balance Sheets and the COVID-19 Crisis

At the onset of the COVID-19 economic crisis, as in other crisis episodes, we observed a rapid appreciation of “safe haven” currencies. We quantify currency-induced balance sheet valuation effects for aggregate external positions as well as for broadly defined asset classes for the first quarter and the full year 2020. To do so, we use new data on the currency composition of cross-border assets and liabilities for 46 countries. In contrast with past financial crises, many emerging markets did not experience losses on their aggregate external balance sheets despite facing a domestic currency depreciation. This was partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, and partly due to reduced currency mismatch on their external debt positions. We conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects and compute the proportion that is due to changes in currency values. For about half of the countries in our sample, currency-induced valuation effects were substantial, representing over 50 percent of total valuation effects in 2020Q1 and the full year 2020.

Fiscal sustainability in highly indebted countries: evidence from Jamaica

PurposeThis study aims to explore the sustainability of Jamaica’s public debt over a highly volatile period of time.Design/methodology/approachThe authors use a suite of econometric tools, including, unit root testing, cointegration testing and estimating a fiscal reaction function. The authors control for structural breaks in the regression analysis.FindingsThe authors find that whilst reschedulings might be indicative of cash-flow problems in Jamaica, fiscal policy has responded effectively to increase the public debt, thereby making the debt sustainable. Notwithstanding the political economy and social demands of the population prior to the impact of the pandemic, the implications of higher debt stocks (higher debt-servicing and lower social expenditures) might make this approach to fiscal policy and debt management infeasible. As a result, the authors recommend that the government will need to take an active approach in managing its debt position to facilitate responses to shocks and provide conditions within which maintaining fiscal discipline is feasible.Originality/valueTo the best of the authors’ knowledge, this is the first study to explore fiscal sustainability in Jamaica over this time period whilst taking into consideration structural breaks caused by the global financial crisis and debt restructurings. The authors also take into consideration variables such as exchange rates and the occurrence of elections, which have not been included in previous studies.

How do income and the debt position of households propagate fiscal stimulus into consumption?

Expansions in public spending induce a surge of private consumption that is accompanied by increasing post-tax income of households, on average, during the U.S. postwar era. Endogenously reacting income, however, appears insufficient to fully rationalize conditional co-movement of private and public spending: private spending even expands in times during which disposable income does not rise, and for medium-income household groups that do not experience income gains. Corroborating these observations, we show within a SVAR-IV framework that fiscal stimulus causally prompts households to take on more credit. This favorable debt cycle is paralleled by dropping credit rates/spreads and inflating collateral prices, e.g., real estate prices, suggesting that softening borrowing constraints support the accumulation of private debt and help rationalizing the absence of consumption crowding-out.

Фіскальні експансії та проблеми боргової стійкості під час пандемії

Unprecedented epidemic and economic world-wide crises in 2020-2021 and large-scaled actions of state support for economies and humanitarian areas attracted attention to the problems of developments and effects of the active fiscal policy, as well as the methods of securing a long-term debt sustainability for public finances. The purpose of this article is revealing the common global and country-specific forms of expression of the fiscal and debt expansions in the course of pandemic and economic uncertainty, identification of their potential effects as well as defining paths for making public debt manageable over the long run. To achieve this purpose, the author reviews theoretical sources, research and advisory papers of the international organizations, elaborates on international databases of economic and financial indicators, applies a generalization method, historical and logical methods, methods of comparisons, analysis and synthesis. As a result, the author identifies the major achievements and problems of active implementation of the anti-crisis fiscal policy in the global context, analyses the dynamics of debt expansions in the different country groups and emphasizes the problem of accumulation of the debt-related risks. The common and distinguished features of the fiscal policy stance and debt position in Ukraine are revealed as compared to situations in other countries. The author suggests a set of debt burden indicators and calculates their values for Ukraine, that enables to establish a debt risk profile for Ukraine’s public finances. Taking into account the global problems of fiscal rules modifications, enhancing their role for debt sustainability, as well as particularities of the fiscal policy and debt position of Ukraine’s government, the author develops the proposals, aimed at strengthening the fiscal sustainability of Ukraine with simultaneous application of the anti-crisis potential of fiscal policy.

Regional and municipal debt in the Eurozone: a cross-country analysis

ABSTRACT This paper analyses the development of sub-sovereign debt in the Eurozone, based on a sample of 58 regional and municipal governments for the period 2004–17. The findings show that when examined from the prism of sub-sovereign debt, Eurozone countries cannot be readily divided into core and periphery, as conventionally done nationally. For many countries, a significant domestic variegation in local economic conditions is identified. Driving forces in the rise of debt positions are also varied. Despite such variegations, the analysis also confirms the overarching role of national governments in setting the fiscal and financial boundaries within which local governments operate.

How Do Income and the Debt Position of Households Propagate Fiscal Stimulus into Consumption?

How Do Income and the Debt Position of Households Propagate Fiscal Stimulus into Consumption?