Debt Dynamics and Contingency Financing: Theoretical Reappraisal of the HIPC Initiative

Sovereign debt management, External debt, Foreign aid, Growth models, Economic development

Assessing the Aid Allocation and Debt Sustainability Framework: Working Towards Incentive Compatible Aid Contracts

This paper criticizes the current International Development Association (IDA) aid allocation and debt sustainability framework on the grounds of their over-reliance on the country policy and institutional assessment (CPIA) as the guiding criterion. It argues that CPIA-centred allocation of aid fails to introduce an incentives structure supportive of a genuine donor-recipient partnership, conducive to development. Further, it claims that the CPIA-dependent debt thresholds-central to the new debt sustainability framework-effectively submit sustainability concerns to the policy performance prerogatives of the aid allocation system. Resting on a thin empirical basis, such approach fails to take due account of low-income countries' vulnerability to exogenous shocks, as a key determinant of debt distress. As an alternative to the current CPIA-based scheme, the paper outlines the key features of a state-contingent mechanism, guiding both aid allocation and debt sustainability analysis.foreign aid, economic development, aid allocation, debt sustainability

Leverage and Capital Structure Determinants of Chinese Listed Companies

This paper assesses the financial fragility of the Chinese economy by looking at risk factors in the corporate nonfinancial sector. Total debt in the People’s Republic of China has increased significantly in recent years, mostly on account of nonfinancial corporate debt. Earning and the financial performance of corporate firms have weakened, and so has the asset quality of the financial sector. In this paper, quantile regressions are applied to a rich dataset of Chinese listed companies contained in Standard & Poor’s IQ Capital database. We find higher sensitivity over time of corporate leverage to some of its key determinants, particularly for firms at the upper margin of the distribution. In particular, profitability increasingly acts as a curb on corporate leverage. At a time of falling profitability across the Chinese nonfinancial corporate sector, this eases the brake on leverage and may contribute to its continuing increase

Chinese Corporate Leverage Determinants

Total debt in the People’s Republic of China surged to nearly 290% as a ratio to GDP by the second quarter of 2016, mostly on account of non-financial corporate debt. The outpouring of credit to stem the impact of the global financial crisis accentuated industrial overcapacity in traditional sectors, such as steel, cement, and energy, while feeding asset bubbles in the property, equity and bond markets. At the Chinese corporate level, this has translated into weakened fundamentals and a fall in industrial profits, particularly of SOEs. As debtors struggle to service interest payments, non-performing loans (NPLs) have been on the rise. This paper assesses the financial fragility of the Chinese economy by looking at risk factors in the non-financial sector. We apply quantile regressions to a dataset containing all Chinese listed companies in Standard & Poor’s IQ Capital database. We find higher sensitivity over time of corporate leverage to some of its key determinants, particularly for firms at the upper margin of the distribution. In particular, profitability increasingly acts as a curb on corporate leverage. At a time of falling profitability across the Chinese non-financial corporate sector, this eases the brake on leverage and may contribute to its continuing increase

External debt and macroeconomic vulnerability: A proposal for state-contingent debt contracts to achieve low-income country debt sustainability.

We argue that the 'New Debt Sustainability Framework' (DSF), as recently introduced by the Bretton Woods Institutions, is tailored to suit the aid allocation mechanism centred on the Country Policy and Institutional Assessment (CPIA), but fails to take into account low-income countries' economic vulnerability and exposure to exogenous shocks. As a result, the DSF further undermines the effective delivery of aid by the International Development Association (IDA), and fails to support recipient countries in their efforts to achieve lasting debt sustainability. Furthermore, we demonstrate that the findings of the empirical studies underlying the DSF and IDA14 replenishment are not robust to the introduction of vulnerability measures, such as the Economic Vulnerability Indicator (EVI), which undermine the significance of the CPIA in predicting debt distress episodes. In order to overcome the shortcomings of the DSF, we propose the introduction of a Contingency Debt Sustainability Framework (CDSF), which distinguishes between the causes of vulnerability underlying the external debt problem affecting most of the low-income countries. Drawing on the most established strands of sovereign debt and contract theory literature, we argue that state-contingent debt contracts represent the most effective financial instrument to link aid allocation and debt relief to recipient countries' financial requirements, contingent on the state of nature. To implement state-contingent contracts in the specific context of low-income debtor countries, we devise an accounting method by which shock and trend factors in the balance of payments are distinguished by their exogenous or endogenous origin. On the basis of this distinction, the CDSF financially compensates debtor countries for exogenous shock and trend factors, without giving rise to significant moral hazard implications. The CDSF is then simulated for the case of Uganda during the period 1988-2002, demonstrating its effectiveness in dealing with Uganda's severe exposure to price shocks and negative terms of trade

Low-income countries and commodity price volatility

KEY MESSAGES: ∙ Low-income countries (LICs) are highly vulnerable to fluctuations in commodity prices. Excessive price volatility complicates macroeconomic management and can worsen long-run growth and development prospects. ∙ Financial speculation has caused price volatility in the international markets beyond what could possibly be explained on the grounds of fundamentals of supply and demand alone. ∙ Field studies of the cotton and coffee sectors in Tanzania and Uganda show that sound market structures and institutions need to be in place for producers, households and villages to cope with price shocks. ∙ The case study of copper in Zambia highlights the extraordinary difficulties LICs encounter in devising appropriate monetary and exchange rate policies over the commodity price cycle. ∙ Overall, we reach the conclusion that LICs' vulnerability to commodity price volatility requires international support targeting supply-side constraints, together with the establishment of a financing scheme compensating the effects of price shocks. Of course, it is crucial that international support be premised on the pursuance of sound governance and macroeconomic policy at the domestic level. ∙ In support of our argument for an increased role of foreign aid as a temporary device to counter excessive price volatility, we outline the main features of our proposal for such a compensatory financing mechanism and show, in the case of Uganda, that its application would be highly effective and relatively cost-efficient in achieving the goal of increased protection from price volatility and trade shocks more in general

Production Complexity, Adaptability and Economic Growth

This paper analyzes the impact of production complexity and its adaptability on the level of output and on its rate of growth. We develop an endogenous growth model where increased complexity raises the rate of economic growth but has an ambiguous effect on the level of output. Our empirical measure of production adaptability captures the proximity of production sectors within the product space, which we modify to reflect intra-industry trade and the international fragmentation of production. We test the model against a sample of 89 countries over the two decades to 2009 and find that its main predictions are validated