Recent Changes in Debt Sustainability Framework and Non-Concessional Borrowing: MDB Meeting Highlights

Discussion on debt sustainability and non-concessional borrowing at the MDB Meeting in Washington, May 2014. Topics covered include diagnostics, responses, and the impact of debt relief on recipient countries. Insights provided on accessing international capital markets and the challenges faced by post-HIPC and MDRI countries under the Debt Sustainability Framework.

• Debt Sustainability
• MDB Meeting
• Non-Concessional Borrowing
• International Capital Markets
• Development Finance.

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1. Recent changes in the debt sustainability framework, and non- concessional borrowing MDB Meeting on Debt Issues Washington, 6-7 May 2014 Benoit Chervalier, Head, Resource Mobilization and External Finance Division

2. Outline of the Discussion I. Diagnostics II. Responses III. Concluding remarks

3. Background May 2000 May 2000 November 2011 November 2011

4. Diagnostics: A Rising Africa Between 2000 and 2010: 6 of the world s 10 fastest growing economies were ADF Countries Average growth of more than 5% World s 10 fastest growing economiesb (annual average GDP growth, %) 2001 2010c Angola 11.1 2011 2015d 9.5 China China 10.5 India 8.2 Ethiopia 8.1 Myanmar 10.3 Nigeria Mozambique 7.7 8.9 Ethiopia Tanzania 7.2 8.4 Kazakhstan 8.2 Vietnam 7.2 Chad Congo 7.0 7.9 Mozambique Ghana 7.0 7.9 Zambia 6.9 Cambodia 7.7 Rwanda Nigeria 6.8 7.6 a. The Economist, January 6, 2011. b. Excluding countries with fewer than 10 million people. c. 2010 estimate. d. Forecast. 4

5. Classification of RMCs by HIPC Status (as at End-March 2014) Countries Countries Status and Debt Relief Provided Status and Debt Relief Provided USD mm 8,533 8,533 6,085 4,938 HIPC MDRI Debt relief committed Debt relief delivered Debt relief under HIPC and MDRI has substantially alleviated debt burdens in recipient countries and has enabled them to increase their poverty- reducing expenditure by almost three and a half percentage points of GDP between 2001 and 2012

6. Diagnostics Increased trend on accessing international capital markets Context of low interest rates Country Issue date Maturity (years) Amount (USD mm) Yield Subscr. (times) Zambia Aug-12 7 750 5,625 % 16 Rwanda May-13 10 450 6.875 % 9 Nigeria Jul-13 10 500 6.625 % 4,5 Ghana Aug-13 10 1000 7.875 % 2,7 Country 10 year maturity Yield (end 2012) 10 year maturity Yield (end 2013) United States 1.912 % 3.028 % Germany 1.479 % 1.929 % Italy 4.232 % 4.125 % Portugal 6.329% 6.010% Spain 5% 4.128%

7. Diagnostics Post-HIPC and MDRI countries are still constraint by Debt Sustainability Framework Need for resources but concessional aid (for Africa) is declining Net ODA 160 140 120 100 80 60 40 20 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Net ODA

8. Diagnostics Relative low risk low risk of debt debt distress distress However some degree of vulnerability exogenous exogenous shocks shocks vulnerability to Effect of Hypothetical $500mn Eurobond Issuance Country % GDP % Gov. Revenue Increase in debt level (% leave) South Africa 0.1 0.5 0.3 Nigeria 0.2 0.6 1 Kenya 1.1 4.2 2.2 Ghana 1.2 5.5 2.1 Cameroon 1.8 9.6 10

9. Responses Amend the Debt Sustainability Framework Measures to accompany countries in accessing to capital markets Graduation frameworks for smooth transition InnovativeFinancial instruments

10. RESPONSES: Debt Sustainability Framework More flexibility (debt limits) Smart Investments

11. Responses: Access to Financial Markets Implement measures to reduce effective borrowing costs Guarantees to extend debt maturities or Improve access to capital markets (e.g. ADF s new Partial Credit Guarantee) Need to finance sustainable projects (financing infrastructure gap) Advisory services

12. Responses: Graduation Graduation policy Creditworthiness assessment exercise Differentiation among ADF countries under ADF 13 Adoption in 2011 of the Transition Framework for countries changing status

13. Responses: Innovative Financial Instruments Amendments of the Credit Policy (currently under revision) Donor loans (IDA-17, WG ADF-13) Guarantees

14. African countries Issuing Bonds (2011-2013) Morocco Egypt ADF Countries ADB Countries Drapeau du S n gal Senegal Nigeria Drapeau du Ghana Ivory Coast Africa bond issuance Ghana Drapeau du Rwanda Rwanda Gabon 2008 2009 2010 2011 2012 2013 Lehman collapse 200 mn USD 4.8 bn USD 1.5 bn USD 4.3 bn USD 9.6 bn USD Drapeau de la Tanzanie Tanzania Drapeau de l'Angola Drapeau de la Zambie Angola Zambia Drapeau du Mozambique Mozambique Namibia

15. African Countries accessing financial markets (excluding South Africa) Exponential growth in the last 3 years Total amount Issed (ADB+ADF) Variation 9050 +4785 4265 +2765 1500 2011 2012 2013 With an average spread of 563 basis points

16. ADB Countries accessing financial markets (excluding South Africa) ADB Amounts Increase 5200 3328 +1872 +2828 500 2011 2012 2013 With an average spread of 503 basis points

17. ADF Countries accessing financial markets ADF Amounts Variation 3850 +2913 937 1000 -63 2011 2012 2013 With an average spread of 650 basis points

18. Concluding Remarks A crossroad: Opportunities and Risks Risks: growing domestic debt in many LICs; countries going to borrow from the capital market (rationale, where to invest, structural deficits) Opportunity for reforms: innovative approaches; accelerated graduation for some countries Adequate responsesneeded to ensure long term financial sustainability