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External Debt in India & Other Emerging

Economies

Submitted by: Swantantra Saurbh 13020241055

Taru Bakshi 13020241058Siddharth Shah 13020241050 Rameshwar Rao 13020241059

Vinit Gala 13020241063

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Contents• External Debt: Meaning & Definitions• Classification of External Debt• Indicators of External Debt• Composition of India’s External Debt• Debt Service• Comparison with Emerging Economies • Sovereign External Debt• References

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External Debt: Meaning and Definitions

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External Debt : Meaning

• Part of the total debt of a country that is owed to Creditors outside

the country.

• Debtors can be government, Corporations or Citizens of that country.

• Debt includes money owed to Private Commercial banks,

Governments or International Financial Institutions.

• External Debt can be Long Term and Short term both.

• Main Components of India’s External Debt are External Commercial

Borrowings, Short term Debts and rupee denominated NRI deposits.

•  IMF defines the key elements as follows:1. Outstanding and Actual Current Liabilities2. Principal and Interest3. Residence4. Current and Not Contingent

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Definitions1. Long and Short-term:

Long term debt is defined as debt with an original maturity of more than one

year, while short term debt is defined as debt repayments with an original

maturity of one year or less.

2. Multilateral and Bilateral Debt:

Multilateral creditors are primarily multilateral institutions such as the

International Development Association (IDA), International Bank for

Reconstruction and Development (IBRD), Asian Development bank (ADB) etc.

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2. Multilateral and Bilateral Debt (Cont.):

Bilateral creditors are sovereign countries with whom sovereign and non-

sovereign entities enter into one-to-one loan arrangements. Some of India’s

bilateral creditors who extend loans include Japan, Germany, United States,

France, Netherlands, Russian Federation etc.

3. Sovereign (Government) and Non-Sovereign (Non-Government) debt

Sovereign debt includes:

(i) external debt outstanding on account of loans received by Government of

India under the ‘external assistance’ programme

(ii) Other Government debt comprising borrowings from IMF

(iii) FII investment in Government Securities

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Non-sovereign includes the remaining components of external debt.

4. Trade Credits/Export Credits

Trade credits/Export credits refer to loans and credits extended for imports by

overseas supplier, bank and financial institution to sovereign and non-sovereign

entities.

5. External Commercial Borrowings

The definition of commercial borrowing includes loans from commercial banks,

other commercial financial institutions, money raised through issue of securitized

instruments like Bonds

4. Concessional Debt

It means long maturity and less-than-market rates of interest charged on

borrowings

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Classification

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Classification of External Debt• Generally external debt is classified into four heads:

(1) public and publicly guaranteed debt;(2) private non-guaranteed credits;(3) central bank deposits; and(4) loans due to the IMF.

• However the exact treatment varies from country to country. For example, while Egypt maintains this four head classification, in India it is classified in seven heads:

(a) multilateral,(b) bilateral,(c) IMF loans,(d) Trade Credit,(e) Commercial Borrowings,(f) NRI Deposits,(g) Rupee Debt, and

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Indicators of External Debt• Examples of debt burden indicators include the(a) Debt to GDP ratio,(b) foreign debt to exports ratio,(c) government debt to current fiscal revenue ratio etc. This set of indicators also covers the structure of the outstanding debt

including the(d) share of foreign debt,(e) short-term debt, and(f) concessional debt in the total debt stock.

A second set of indicators focuses on the short-term liquidity requirements of the

country with respect to its debt service obligations. These indicators are not only useful

early-warning signs of debt service problems, but also highlight the impact of the inter-temporal

trade-offs arising from past borrowing decisions. Examples of liquidity monitoring indicators include:

(a) debt service to GDP ratio,(b) foreign debt service to exports ratio,(c) government debt service to current fiscal revenue ratio etc.

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Composition of India’s External Debt

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Current Status of Outstanding Debt

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Borrower Classification

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Currency Composition of External Debt

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Debt Service

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DEBT SERVICE• Debt service payments and debt service ratio occupy a

central place in analysis of external debt

• Debt service payments or servicing of external debt is defined as the set of payments, inclusive of both principal and interest that are made to meet debt obligation

• Debt Service Ratio:Debt service ratio is measured by the proportion of total debt service payments (i.e. principal repayment plus interest payment) to current receipts of Balance of Payments (BoP). It indicates the claim that servicing of external debt makes on current receipts and is, therefore, a measure of strain on BoP due to servicing of debt service obligations

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Trends in India’s Debt Service Payments

$32.3 B

increase of 3.1%

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Trends in India’s Debt Service Payments

• Gross debt service payments amounted to US$ 32.3 billion during 2013-14, recording an increase of 3.1% over the previous year

• Principal repayments accounted for 65.4% in the India’s total debt service payments in 2013-14, while the rest 34.6% was on account of interest payments

• Increase in debt service payments was on account of higher interest payments for NRI deposits and larger repayment of external commercial borrowings during 2013-14

• Debt service ratio stood at 5.9% in 2013-14, same as in the previous year

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Component-wise debt service payments during 2008-09 to 2013-14 indicate the predominance ofcommercial borrowings

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Domination by External Commercial Borrowings

• India’s debt service payments are dominated by the external commercial borrowings which accounted for 72.4% of gross debt service payments during 2013-14. Other components such as NRI deposits, external assistance and rupee debt service contributed the rest 27.6%

• The dominance of external commercial borrowings is an indication of growing recourse to their use by the companies to meet their financing requirements

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Official Vs. Private Creditors• The average terms of new commitments to India from

official and private creditors continue to indicate that it is favourable to avail credit from official vis-à-vis private creditors

 Official

Creditors  Private

CreditorsLoan

Amount 1000000 1000000Interest

Rate 1.40% 3.60%Term 25 7

PMT($47,684.04

)  ($164,155.3

7)

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Projections of Debt Service Payments

YearPrincipal

Interest

Total (2+3)

1 2 3 42014-

1524,99

54,519

29,514

2015-16

23,369

4,17527,54

42016-

1725,86

93,537

29,406

2017-18

22,791

2,86125,65

22018-

1922,26

42,300

24,564

2019-20

14,330

1,78916,11

92020-

2111,57

91,403

12,982

2021-22

10,036

1,13211,16

82022-

2310,44

5938

11,383

2023-24

8,093 685 8,778

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-240

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Projected Debt Service Payments (US$ billion)

Principal Repayments Interest Payments Total Debt Service Payments

• Debt service projections based on long-term debt outstanding at the end of March 2014 show that debt service payments would reach US$ 29.5 billion in 2014-15

• The large debt service payments are primarily on account of

higher repayments of ECBs.

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Emerging Economies

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Emerging EconomiesDefinition : Rapidly growing volatile economies, promising huge potential for growth but content with significant political, monetary and social risks.

Set of defining characteristics1. Transitional Economy2. Young and Growing Population3. Underdeveloped Infrastructure4. Increasing Foreign Investment

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External Debt of developing countries

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Comparison of top 20 developing countriesSI No: Country

Total External Debt Total Debt

Short-Term Debt

Debt Service Ratio

Foreign Exchange reserves

(In $ Mn) to GNI (%) to Total Debt(%) (%) to total debt (%)1 China 754009 9.2 67.6 3.3 441.82 Brazil 440478 19.9 7.4 15.5 83.93 India 379099 20.8 24.6 6.8 71.44 Mexico 354897 30.7 20.4 17.7 45.25 Turkey 337492 43.1 29.9 26.1 29.66 Indonesia 254899 29.9 17.6 17.1 42.77 Hungary 203757 173.4 11.2 84.6 21.88 South Africa 137501 36.6 20.3 7.9 329 Kazakhstan 137014 79 6.8 23.5 16.2

10 Ukraine 135067 77.9 25.7 31.5 16.811 Thailand 134223 38.2 42.4 4.1 129.112 Romania 131889 78.9 20.5 34.2 31.213 Argentina 121013 26.3 11.6 13.2 3314 Malaysia 103950 35.5 45.2 3.5 132.515 Colombia 79051 22.4 13.5 22 46.116 Venezuela 72097 19.4 26.9 5.6 13.717 Pakistan 61867 25.5 4.2 14.9 16.618 Philippines 61390 24.6 13.8 8 119.719 Vietnam 59133 44.1 16.7 4.4 43.220 Peru 54148 29.4 15.8 12.5 115.1

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Comparison of change in external debt of top 20 developing countries between 2000 - 2012

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Present Value Concept• Useful measure of indebtedness.• Discounting all future debt service

payments by prevailing market interest rates.

• Commercial Interest Reference Rates ( Published by OECD ).

• PV of India’s external debt was US$ 324.3 Billion in 2012.

• Ratio of PV of external debt to GNI and to export at 17.8% and 71.5% respectively.

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Sovereign External

Debt

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Sovereign External Debt• Sovereign external debt refers to foreign

debt contracted by the Government of India

• Sovereign external debt has assumed importance in the backdrop of sovereign debt crisis in the euro zone

• Borrowings are primarily from multilateral and bilateral sources and are long-term in nature

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Composition of Sovereign External Debt

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Composition of multilateral and bilateral

debt

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Movement in sovereign external debt

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Currency Composition of Sovereign External Debt

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Sovereign External Debt Service

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References• http://en.wikipedia.org/wiki/External_de

bt• http://www.thehindu.com/business/Econ

omy/external-debt-drops-to-4003-b-at-endsept/article5522843.ece

• http://businesstoday.intoday.in/story/indias-external-debt-at-usd-426-billion-in-december/1/204695.html

• http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=13749

• http://www.indiafinancebrief.com/index.php/opinion/157-from-the-editors-desk/187710-indias-external-debt-a-quick-digest-knowledge-series

• http://www.finmin.nic.in/the_ministry/dept_eco_affairs/economic_div/External_Debt_QDEC2013.pdf

• http://www.businessweek.com/articles/2013-03-03/how-the-developing-world-escaped-this-debt-trap

• : http://www.bloomberg.com/visual-data/best-and-worst/best-emerging-markets-2014-countries

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Thank You