World's top bankers say developing nations' debt crisis is abating
Nearly a trillion dollars of debt may seem like a recipe for disaster. But to the experts at the World Bank, the Inter-American Development Bank, Morgan Guaranty Trust Co., and elsewhere, the world debt crisis has abated considerably.
In 1985, the total external debts of the world's developing countries could grow to $970 billion, from $895 billion at the end of 1984.
But ``it is a mixed picture,'' says Arturo Porzecanski, an economist with Morgan Guaranty in New York. ``I don't think you solve these $100 billion problems overnight. You manage them. You chip away at them.''
Jacque de Larosiere, managing director of the International Monetary Fund (IMF), said in a recent speech: ``On the basis of plausible assumptions concerning policies in the debtor countries, international financing, and the evolution of the world economy -- including the critical assumption that trade restrictions are not intensified -- a workable outcome is, indeed, possible.
``We anticipate a considerable further easing of the debt burden and manageable debt-service ratios at least in the aggregate.''
Even Rudiger Dornbusch, an economist at the Massachusetts Institute of Technology who was highly pessimistic a year ago, now notes that there is ``almost a consensus that the worst part of the debt crisis is already gone, at least in what concerns the external financial aspects.''
Mr. Dornbusch is still concerned about the steep fall in per-capita real incomes in many debtor nations. ``Even optimists doubt that Latin America will return to the 1980 real income levels before the end of the decade.'' This could cause political unease or worse.
The president of the Inter-American Development Bank, at its annual meeting in Vienna last week, warned of the danger of a world recession leading to social unrest. ``Prolongation of this state of affairs may have explosive consequences,'' Mr. Antonio Ortiz Mena said.
The experts also anticipate periodic clashes over debt reschedulings or about the terms required of the debtors by the for International Monetary Fund loans. Indeed, the IMF is currently in the midst of a dispute with Argentina over measures needed to reduce its 700-percent inflation rate. The fund has told commercial bank creditors that it will not allow Argentina to make further drawings on its $1.4 billion IMF credit until fresh economic targets are negotiated.
But few students of this problem are now afraid that major debtor nations like Mexico, Brazil, and Argentina will default on their loans from economic necessity or even for political advantage.
For example, earlier last week Mexico reached agreement with the IMF on a third and final year of an austerity plan put in place in November 1982, a few months after the nation's financial collapse.
Mexico's ``letter of intent,'' when approved by the Fund's executive board next month, will release a further $1.2 billion of IMF loan money. It cleared the way for signing a multiyear restructuring agreement for $48.7 billion of public-sector foreign debt. A similar arrangement for rescheduling loans of foreign commercial banks to Mexico over several years was worked out last fall. The relative optimism of the experts on the debt crisis hangs on several factors.
For one thing, growth of developing country external debt has slowed considerably. These total liabilities, according to World Bank figures, grew 15.1 percent in 1981 (before the onset of the crisis), 10.4 percent in 1982, 8.8 percent in 1983, and 6.2 percent last year. This year the bank predicts 8.4 percent growth to $970 billion.
However, according to Nicholas Hope, chief of the World Bank's external debt division, the statistics tend to exaggerate the real growth in debt over the last two years. He said that the developing countries, in response to the crisis and the World Bank's Debtor Reporting Service, have been making more detailed audits of their external debts. These have discovered previously unnoticed debts and added them to their totals.
Further, inflation of 5.5 percent last year in traded goods and about the same or a little more this year reduces the amount of real growth in debt.
Also, a number of developing countries, Mexico and Brazil among them, have built up international monetary reserves or other assets in the last year or so. These assets help to offset debts.
Mr. Hope estimates that actual ``real indebtedness'' fell last year and could do so again this year.
Moreover, he figures the net obligations to commercial banks of the key Latin debtors changed little in 1983-84 and, in the case of the East European debtors, declined.
This means that various ratios important to bankers, such as the ratio of debt servicing costs to exports, have improved.
In a recent World Bank report, ``Coping with External Debts in the 1980s,'' bank analysts describe the outlook for 1985 as positive:
``The biggest borrowers have a good chance to restore growth. The less dynamic debtor countries have some scope to initiate longer-term adjustments that would help to restore their external finances and speed up their growth.''
Beyond 1985, much hangs on continued growth in the industrial countries. The World Bank study sees growth prospects in the US economy as ``clouded by the massive deficit projected for the federal budget.'' If a sharp slowdown in the US economy leads to another world recession, most developing countries would be poorly placed to weather it, the World Bank judges.
But if there is a modest, steady reduction in the US deficit and continued growth in the US and other industrial nations, the World Bank sees hope for a gradual fall in real interest rates (after deducting inflation) to an average of 4 percent in the 1985-90 period.
According to World Bank projections, this would allow the industrial countries to grow by an average 3 percent a year in the same period. Developing countries could look to growth of merchandise exports averaging 51/4 percent a year. This would permit them to increase imports and grow 5 percent a year in output during the rest of the decade. The current account deficit of the developing countries would also widen to about $115 billion, comparable to that in 1981. But this would be a considerably lower share of the total output of the developing countries, the bank figures.
To accomplish this growth, the bank continues, the developing countries would have ``to implement policies to increase export earnings rapidly and to restore normal access to both the financial markets and official sources of finance.''
What this means is that the developing countries would have to undertake sufficient domestic economic reforms to restore the confidence of world financial markets and thereby obtain additional money from both private and government sources.
Morgan Guaranty economist Porzecanski speaks of the need for major domestic reforms, such as trimming back the number or size of inefficient government-owned companies, liberalizing the rules for foreign investment and the use of foreign technology, encouraging domestic investors to keep their money at home by allowing sufficiently high interest rates or profits, and eliminating subsidies.
``These are just as important as getting the global economy right,'' he maintains. Such measures, he says, could entice back some of the tens of billions in ``flight capital'' -- money that has been invested in the US or other industrial countries to take advantage of a better return or greater security.
There are other areas of progress. Most of the debtor nations have restructured their debts by turning short-term loans into longer-term ones so that the annual burden of servicing them is more reasonable. Average interest rates have fallen since 1981-82. The non-oil developing countries have cut their external current-account deficit from a peak of $108 billion in 1981 to less than $40 billion in 1984. Last year's deficit represents just about 8 percent of the exports of goods and services of these countries -- the lowest level in at least 20 years.
The IMF's Mr. de Larosiere calls such progress ``spectacular.''
Many of the countries that agreed to IMF programs have started to see their imports and growth rates pick up. Their debt service ratio (the cost of servicing their debts compared to their exports) eased back to a more manageable 21.5 percent last year. Between 1972 and 1982, that key ratio had grown from 12 to 25 percent.
Mr. de Larosiere cautions that ``a long and difficult road'' confronts many debtors before they can regain external financial viability and see living standards rise.
They will, de Larosiere says, have to press on with their ``adjustment efforts,'' such as reducing price distortions caused by subsidies or other devices, keeping realistic exchange rates, letting markets set interest rates, and reducing restrictions on trade and competition.
Moreover, the industrial countries will have to continue growing at about 3 percent or better in the coming years, he says. Should that growth rate fall 1 percent, the growth of the developing countries would also slump by around 1 percent, he calculates. Many of the countries that agreed to IMF programs have started to see their imports and growth rates pick up once again. Their debt service ratio eased back to a more manageable 21.5 percent last year. In the 10 years leading up to 1982, that key ratio had grown from 12 to 25 percent. Brighter outlook for Latin debtors: (Current-account deficits fall as nations stimulate exports, discourage imports) in millions of dollars
1981 1982 1983 1984 Latin America -33,800 -36,900 -4,800 - 200 Argentina - 4,700 - 2,400 -2,400 -2,300 Brazil -11,700 -16,300 -6,800 - 400 Mexico -12,500 - 4,900 5,500 4,100 Venezuela - 4,000 - 4,200 4,400 4,200 Source: Morgan Guaranty Trust in billions of dollars
1981 1982 1983 1984 Latin America -33.8 -36.9 -4.8 -0.2 Argentina - 4.7 - 2.4 -2.4 -2.3 Brazil -11.7 -16.3 -6.8 -0.4 Mexico -12.5 - 4.9 5.5 4.1 Venezuela - 4.0 - 4.2 4.4 4.2 Source: Morgan Guaranty Trust