Loans to poor countries: still sound, but risk is up
Dr. Irving Friedman figures he has imposed an economic squeeze on more nations than any other person around. As a high official with the International Monetary Fund, he helped draw up "many, many stabilization programs" requiring countries to get their fiscal and monetary policies in shape in order to receive loans financing their balance-of-payments deficits.
Undoubtedly, Dr. Friedman was about as popular in some countries as a hangman. Few nations enjoy stringent economic reforms, especially when demanded from outside.
Today, however, the senior international adviser to First Boston Corporation may be more popular in the less-developed countries. After 18 years at the fund , Dr. Friedman joined the World Bank for 10 years as top economic adviser -- helping develop policies and analyses facilitating that bank's development loans to poor countries.
Then he moved over to the private sector, joining Citibank in 1974 and saying that loans to developing countries were, if done with care, sound business. That was a controversial opinion then. Many bankers and economists argued that the quadrupling of oil prices by the OPEC nations would lead to financial disaster. Some poor nations, they argued, would be unable to pay their higher oil bills and collapse financially, leaving a trail of shaken lending institutions.
Dr. Friedman's optimism proved correct. Commercial banks were able to "recycle" the OPEC surpluses with surprising ease. It was one of the economic success stories of the last decade.
The silver-haired economist recalled that Citibank's loans to less-developed countries were only made with the involvement of many people, bringing as much institutional wisdom as possible in the selection of loan customers. The risk paid off handsomely. Citibank has for some years now made more money from its overseas activities (including those in industrial nations) than from its domestic operations.
Concern over recycling of OPEC money again soared with the boost in OPEC petroleum prices last year. The cartel's surplus, which had begun to fade away, once more jumped to an estimated $100 billion last year.
In the meantime, the debt of the developing countries more than quadrupled over the past decade. According to a new study by Chandra Hardy, a visiting fellow at the Overseas Development Council, some 94 developing countries owed an estimated $400 billion at the end of 1980. That's a lot of money.
She adds: "The rate of growth of the debt, Whether measured in real or in nominal terms, has been higher than the growth of output or exports. And the composition of the debt has shifted toward increased reliance on commercial bank loans, resulting in a hardening of the average terms of the debt -- that is, shorter maturities and higher average interest rates. There is little disagreement therefore that the burden of the debt has increased."
As a result, there has been an increase in the number of countries accumulating arrears on payments and in the number of countries renegotiating debts. In 1974, three countries were in arrears about $500 million. At the end of last year, the numbers had risen to 22 nations and $5.5 billion. And since 1975, there have been 16 debt renegotiations for nine countries involving total debt of about $9 billion. For the much longer period between 1956 and 1974, there were renegotiations for 11 countries involving total debt of about $7 billion.
Mrs. Hardy does not expect the pace of countries seeking debt relief to slacken off over the next few years.
"The fact that half of the total debt outstanding of the developing countries is due for repayment over the next three to five years, while the outlook for the resumption of high rates of growth of output and exports is not favorable, attests to both the severity and durability of the problem," she writes.
Dr. Friedman also sees the probability of some developing countries getting into loan difficulty. But usually, he notes, it just results in the loans being stretched out, with interest continuing to be paid. The business has remained highly profitable for the commercial banks. Actual defaults by nations on their debts are rare. Any such nation in default loses its international credit standing. It can no longer borrow from another nation, which can be a serious economic restraint.
Mrs. Hardy calculates that creditors have lost an estimated $2 billion in debt renegotiations since 1956 -- in other words, their profits have been cut that much by interest reductions or loan stretch-outs.
By comparison, the loss of the developing countries from adverse movements in the terms of trade (what they earned from exports vs. what they paid for imports) was an estimated $80 billion between 1973 and 1979. So the rich countries, she figures, got the better deal.
Dr. Friedman is still advising the clients of First Boston to make loans to poor countries -- selectively. His job is to give advice on the best risks in nations, public entities (such as utilities) or private companies. "There is a lot of opportunity for portfolio mix," he says.
Because Mrs. Hardy is highly sympathetic with the problems of the poor countries, she would undoubtedly be pleased that an influential adviser such as Dr. Friedman retains his optimism on poor-country loans. But, she cautions, debt rescheduling should be seen as "normal," and creditors should be less harsh on the terms when negotiating such altered debt agreements. The problems of the poor countries are not just a case of economic mismanagement, but of long-term economic changes that need time f or adjustment, she concludes.